How to Figure Profit 

A Comprehensive Reference Book 

for 

Business Men, Teachers 
and Students 



By P. Roger Cleary 

President Cleary College; Accountant, Auditor 
and Systematizer; Author of the Cleary System of 
Business, Bookkeeping, Accounting and Auditing; 
Formerly Editor of Education Extension and 
Chairman of the Commercial Conference of 
the Michigan Schoolmasters* Club and of the 
Commercial Section of the Michigan State 
Teachers' Association 



Published by 

THE P. R. CLEARY COMPANY 
YPSILANTI. MICHIGAN 



'0 e . '^ 



Copyrighted 1918 

BY 

P. ROGER CLEARY 



All rights reserved 



S)CU51)1731 

m 25 i9i8 



M^ \ 



^6 



e 



To 
H. J. C. 

IN 

Recognition and Appreciation 

OF 

A Splendid Cooperation 



HOW TO FIGURE PROFIT 

is Indispensable to 

THE BUSINESS MAN 

Because 

HIS SUCCESS DEPENDS UPON IT 



HOW TO FIGURE PROFIT 

is Indispensable to 

THE TEACHER 

Because 

HE IS PREPARING THE BUSINESS 
MEN AND WOMEN 

of 
THE FUTURE 



HOW TO FIGURE PROFIT 
IS Indispensable to 

THE STUDENT 

Because 

HE IS THE BUSINESS MAN 
OF TOMORROW 



Publishers' Note 



A Book of Merit 

In presenting- this book to the business, teach- 
ing and student pubHc, we feel that we have 
something not only of interest, but of merit, of 
real money-making value. 

It is Comprehensible 

It is not a book of technical facts, comprehen- 
sible only to the trained business mind. The appli- 
cation of the principle of How to Figure Profit is 
so fully and clearly explained as to be within the 
grasp of the most inexperienced. 

The Ideas are Based upon Experience 

It is the result and happy combination of a 
wide business, accountancy and teaching experi- 
ence. The subject matter has not been gathered 
from books, but from actual touch and contact 
with life; and, because of this fact, the book 
will be appreciated alike by the business man who 
wants to be shown, by the teacher who has been 
brought up on the old arithmetic idea and by the 
student who is preparing to grapple with the real 
problems of life. 



11 



The Book is Understandable 

The author assumes that the idea of figuring 
profit on sale is new or comparatively new to, or 
but little understood by, at least ninety per cent 
of those whom the book is intended to reach; 
and to make it possible for them to get at once 
what might otherwise take days or weeks or even 
months, and to avoid any possibility of their giv- 
ing up in despair or disappointment, he has made 
it possible for him who reads to understand. 

The Points are Getatable 

The author also assumes that those for whom 
the book is intended are busy people and he has 
therefore made it possible for them, thru a topical 
analysis and short, terse chapters to get the vital 
points quickly. 

In a Word — 

The book is readable, un3erstandable, reliable, 
to the point, and, unlike most other books on busi- 
ness, confined to the one subject. 

THE PUBLISHERS 

June, 1918 



12 



Foreword 



How The Idea Came To Me 

The idea of figuring profit on sale rather than 
on cost, as arithmetics universally have been and 
are still very generally teaching it, came to me 
thru practical business and accountancy experience 
and personal contact with successful business men, 
to whom I feel indebted for the many courtesies 
extended me. 



My Teaching — My Practice — My Books 

For years past I have been teaching my students 
to figure profit on sale and have been applying the 
same principle in my accountancy practice. 

The Cleary System of Business, Bookkeeping, 
Accounting and Auditing, widely used in the pub- 
lic schools and colleges, teaches the same idea, not 
as a theory, but as a basic principle of business. 



Unconsciously They Developed The Book 

But for my students, with whom I have been 
in close touch, and for the business men whose 
clubs and associations it has been my privilege 
to address from time to time, this book would 
not have been written. 



13 



They have been not only an inspiration and an 
impelling force to me, but they have opened the 
way for study, investigation and research as it 
would not have been opened had my work been 
confined alone to teaching or to business or to 
accountancy. 

A Profitable Experience 

Fortunately, too, my classroom experience has 
been with subject matter ranging from the sim- 
plest elements of bookkeeping to the most ad- 
vanced stages of manufacturing and mercantile 
cost, and with students ranging in age from 
eighteen to fifty years and in education from that 
obtained in the rural school to that obtained in 
the high school, in the college and in the univers- 
ity and in experience from that of mere casual 
touch with life to years in the store, in the office 
and in teaching. 

Set Them Right in Figuring 

Addressing business men^s clubs and associa- 
tions has given me an opportunity to get first- 
hand, at close range and thru informal discussions 
the methods employed by different persons in the 
same line and in different lines. I know therefore 
the practices of most business men in most lines 
of business. I know also their needs and am sure 



14 



that the points brought out and developed in suc- 
ceeding chapters will set them right in figuring 
profit. 

P. Roger Cleary 

Ypsilanti, Michigan 
June, 1918 



15 



How to Figure Profit 



16 



CONTENTS 



PART ONE 



Principles of Correct Figuring 



I 

PAGES 

Introduction 31- 33 

Mission of This Book 31 

It Will Benefit Three Classes 31 

Value of the General Information 31 

The Completeness of the Discussion Will be Appreciated . 32 

Their Success is Proof 32 

All Will Come to It 33 

II 

The Basis of Figuring is Wrong 34- 37 

Not Strange 34 

The Principle New Even to Business Men 34 

The Arithmetic Idea 35 

The Business Idea 35 

Distinguish Between Cost and Expense 36 

It Does Make a Difference 36 

We Cannot Get Around It 37 

III 
Cost and Expense Defined, Differentiated and Statis- 
tically Grouped 38- 58 

Cost 38 

Different Viewpoints of Cost 39 

That of The Person Using The Term 40 

The Consumer 40 

The Retailer or Wholesaler or Jobber 40 

The Manufacturer , 40 

The Non-Trader 41 



i:' 



Contents 



PAGES 

That of The Business 41 

That of The Stage of Progress 41 

That of The Use in a Particular Stage of Progress . . 42 

That of The Business and The Investor 42 

That of The Bookkeeper and The Accountant ... 43 

Expense 44 

Divisions and Subdivisions of Expense 45 

Statistical or Statement Divisions of Expense ... 51 

Mercantile Business 51 

Manufacturing Business 51 

Divisions of Cost 52 

Mercantile Business 52 

Manufacturing Business . 53 

Statistical or Statement Divisions of Cost 54 

Mercantile Business 54 

Manufacturing Business 54 

The Basis of Cost 55 

Use and Apply Expense Terms Correctly 56 

IV 
Cost Analysis of Manufacturing and Mercantile Busi- 
nesses 59- 69 

Manufacturing 59 

Figure 1 Explained 64 

Mercantile , 66 

Divisions 67 

V 

Confusion of Cost Elements Must be Avoided . . . 70- 71 

Manufacturing Business 70 

Mercantile Business 71 

VI 
Raw Material and Finished Product Differentiated . 72-73 

VII 

Some Conditions Which Affect Cost and Profit . . 74- 77 

The Middleman 74 



18 



Contents. 



P*VGES 

In Theory 74 

In Practice 75 

The Sale Price 75 

The Price May or May Not Vary 76 

VIII 

It Makes a Difference How We Figure 78-82 

The Basis Must be Established 78 

Add the Equivalent to Cost 79 

Find the Expense to Sale 80 

The Per Cent of Profit Not Uniform 80 

It is the Average Profit Which Counts 81 

Large Buyers Have an Advantage 82 

IX 

Profit Defined and Methods of Figuring Explained . ^^- 90 

Definition and Explanation of Profit ^Z 

Methods of Figuring Profit 86 

X 
Why a Net Profit 91- 94 

XI 

What is a Reasonable Net Profit . . . . . . 95-105 

It Depends in a Measure Upon the Business .... 95 

Conditions Which Limit Output 96 

The Gross and Net Profit Made 97 

Novelty and Season Goods 98 

The Consumer is Interested in the Volume 9^ 

The Merchant Should be Interested in the Per Cent ... 99 

The Per Cent Depends Upon the Expense to Sale , . . 100 

Five to Ten Per Cent Net 101 

Most Business Men Do Not Make Enough 103 

Dividend and Profit Not the Same 103 

Reasonable Profit and Large Sales 104 

Decide Upon the Profit and Push the Sales 105 



19 



Contents 



XII 

PAGES 

Profit Too High or Too Low Means a Losing Business . 106-107 

XIII 

Prime or Manufacturing Cost, Gross Profit, Loss and 

Selling Price Illustrated and Explained . . . 108-117 

General 108 

The Diagram Explained 110 

Selling Above Cost Ill 

Selling Below Cost 113 

Cost to Sale 114 

One Hundred Per Cent Not Possible 115 

Selling at a Discount 116 

Selling at a Loss 116 

Selling on an Even Basis, at a Profit or a Loss .... 117 

XIV 

Deviating From the Established Selling Price . . . 118-125 

Selling Price Defined 118 

The Reasons and The Results 119 

Expenses Estimated 119 

The Basis is Wrong 120 

The Price is Fixed for Them 120 

Method of Figuring Wrong 121 

Sliding Scale Price 121 

Special Discounts for Special Reasons 122 

The Merchant Knows What He is Doing 123 

One Price Wins 124 

XV 

Some Eye-Openers 126-130 

25% Added to Cost Does Not Mean 25% Gross Profit . . 126 

The Same Amount Added to Different Costs Will Not Pro- 
duce the Same Profit 127 

XVI 
The Two-and-Three-for-a-Quarter Idea .... 131-138 
Wrong on the Face of It 131 



20 



Contents 



PAGES 

It Does Not Increase Trade 132 

How Trade May be Increased 132 

It is a Money Loser 133 

It Will Not Work in Practice . 133 

Do a Little Figuring 135 

It is a Human Impossibility 136 

It Spells Ruin 136 

Some Articles Must be Sold at a Loss 137 

A Retail Business Which is Being Discussed 138 

XVII 

Net Profit the Same Whether the Town or the Business 

be Large or Small 139-144 

The Impression is Wrong 139 

The Proportion the Same 139 

Sales in Proportion to Expenses 141 

Expenses May be Too High or Too Low 142 

The Change is Good Business 143 

Expenses Should Increase the Sales 144 

XVIII 

Good Buying a Factor in Net Profit ..... 145-147 

First 145 

Second 146 

XIX 

The Per Cent to Add to Cost to Get the Per Cent of 

Profit Desired . 148-154 

Per Cent of Profit Known; Per Cent to Cost Unknown . . 151 

Per Cent to Cost Known; Per Cent of Profit Unknown . . 152 

Only a Few Equivalents Necessary 153 

XX 

Percentage and Price Lot Methods of Figuring Profit on 

Daily Sales 155-167 

Mercantile Businesses 155 

Store Organization and Management .... 155 



21 



Contents 



PAGES 

Departmentlzatlon 157 

Percentage Method 158 

Methods of Keeping Track of Sales 158 

Basis for Determining Gross Profit on Sales .... 159 

Price Lot Method 162 

Manufacturing Businesses 167 

XXI 

The Turning of Investment 168 

What Turnover Means 168 

They Have the Wrong View of It 169 

Capital and Stock Investment Not the Same .... 170 

Turnover in a Trading Statement 171 

What Stock Investment Means 172 

Attention Should be Directed to Stock 172 

A Unit and Value Record 175 

Replenishing Stock 176 

Basis of Expansion 177 

Credit Sales 177 

Stock Investment as Applied to Turnover 178 

Procedure 178 

Discounting Bills 180 

Which is the More Profitable 180 

Figuring Ahead 181 

Credit Basis 183 

A Safe Guide 186 

How Often Should a Business Turn Merchandise Investment 187 

Increasing Sales From Net Profit 187 



22 



PART TWO 



Application of the Principles of Correct Figuring 
to Your Business 



XXII 

PAGES 

General to Manufacturing and Merchandising . . . 191-200 

Business Defined 191 

The Principles Apply to All Businesses 192 

Study Other Businesses as Well as Yours 192 

Certain Businesses Not Easily Identified 195 

The Charting of Your Expenses 196 

XXIII 
A Working Outline for a Manufacturing Business . . 201-212 

The Same General Principles Govern 201 

Cost Basis 202 

A Simple System of Cost Keeping 203 

Information Your Cost System Should Give You . . . 203 
Statement I: 

Cost of Analysis of a Year's Business .... 205 
Statement II: 

Profit Analysis of a Year's Business 206 

Statement III: 

Percentage Analysis of a Year's Business . ... . 207 

Expense Charts 209 

Manufacturing 209 

Commercial 210 

Direct 211 

Statistical 211 

Cost Grouping 211 

XXIV 
A Working Outline for a Trading Business . ... 213-234 

Expense Charts 213 

Carrying Expense . . . *. 213 

Merchandise Deductions 214 



23 



Contents 



PAGES 

Operating Expense 214 

Direct Expense 215 

Statistical 215 

Cost Grouping 215 

Treatment of Carrying Expense 218 

Treatment of Merchandise Deductions 220 

Operating Expenses 221 

Direct Expenses 222 

The Selling or Marked-Up Price 222 

What the Gross Profit is Expected to Cover .... 223 

Getting Down to Actual Figures 224 

Movement of the Stock the Real Test 226 

The Week's Average 226 

The Estimated and The Actual Profits 227 

Correct Stockkeeping Necessary to Correct Figuring . . 228 

Inventory Your Stock 228 

Merchandise Books 229 

The Second Week's Operations 233 

The Month's Operations 233 

Take a Monthly Statement 233 

Inventory at Selling Price 234 

XXV 
Expense Charts for a Non-Trading Business . . . 235-237 

Revenue Business 235 

Mutual Business 235 

Expense Chart 236 

XXVI 
Treatment of Certain Expense Accounts .... 238-256 

Rent of Building 238 

Proprietorship Salary or Salaries 239 

Depreciation 239 

Bad Accounts 241 

Interest on Borrowed Capital 244 

For Current Needs 244 

For Construction Purposes 247 

Interest Not an Operating Expense 249 

Interest on Investment 252 



24 



PART THREE 



By Way of Suggestion 



XXVII 

PAGES 

A Bookkeeping System 259-262 

Single Entry 259 

Double Entry — Cost System 260 

XXVIII 

Mutual Understanding 263-265 

Educate the Public 263 

A Word to the Consumer 264 



25 



Charts and Diagrams 



TITLE 



PAGE 



1 Grouping of Costs in a Manufacturing Business . 63 

2 Grouping of Costs in a Mercantile Business . . 65 

3 Prime or Manufacturing Cost, Gross Profit, Loss 

and Selling and Sale Prices Illustrated . Facing 110 

4 Price Lot Method of Figuring Profit . . . .164 

5 Sales Analysis Chart — Cash Business . . . .174 

6 Sales Analysis Chart — Credit Business . . .185 

7 Merchandise Summary Facing 232 



2Q 



DIVISIONS 



Part I — Principles of Correct Figuring 

Part II — Application of the Principles of Correct 
Figuring to Your Business 

Part III — By Way of Suggestion 



27 



PART ONE 



Principles of Correct Figuring 
Chapters I to XXI Inclusive 



29 



A Reasonable Net Profit 

IS 

The Business Man's Right 
Correct Figuring Will Produce It 

AND 

The Buying Public Will Pay It 



30 



I 

Introduction 



Mission of This Book 

It is not exactly the mission of this book to 
teach the business man how to systematize his 
business, but rather to teach him how to figure 
profit under the varying conditions which arise in 
business. Business organization, business system, 
business management, etc., are subjects too big to 
be included under this head, but so closely related 
to it as at least to make their consideration neces- 
sary to a proper development of the subject of 
"How to Figure Profit". 

It Will Benefit Three Classes 

And, although this book is written from the 
standpoint of the business man and primarily for 
his use, the information given will be of no less 
value to the teacher who is preparing the business 
men and women of the future, or to the student 
who is soon to take up the duties and responsi- 
bilities of an active business career. 

Value of the General Information 

It is these three classes that this book is in- 
tended to reach and to set right in figuring profit. 



31 



I Hozv to Figure Profit 

The vast amount of general business information 
outside, yet directly related to, the subject under 
consideration is designed to lead the reader to an 
intelligent understanding of the correct principles 
of figuring profit and to furnish conclusive proof 
of the soundness of the principles advocated. This 
information will be of real value to the business 
man, to the teacher and to the student in learning 
how to use the ''key'^ to business success. 

The Completeness of The Discussion Will be Appreciated 

The bare facts might be stated in a paragraph, 
and they would be understood by those who are 
now applying the principles; but those not skilled 
in accountancy or in the practical side of business 
need to be shown, and they will appreciate the 
fullness and completeness of the discussion of the 
subject under the various related heads in succeed- 
ing chapters. 

Their Success is Proof 

In writing this book, the author is aware that 
only the most successful business men are fully 
educated to the idea of figuring profit on sale. 
But the phrase ''successful business men" furn- 



32 



Introduction I 

ishes all the evidence necessary as to the sound- 
ness of the idea. If the idea were not good, suc- 
cessful business men would not use it; but the 
fact that they do use it is, in itself, proof that 
the idea is right, as, otherwise, they would not be 
successful. 

AU Wai Come to It 

The author is also aware that this book will go 
into the hands of many who will not at first agree 
with him, but before they put the book aside they 
will. Business men certainly will, and teachers 
and students will come to it, just as they have 
come to believe other important facts. It is neces- 
sary only to understand the practical side of busi- 
ness to see and appreciate what the application 
of the principles herein advocated means to the 
business man. 



33 



II 

The Basis of Figuring is Wrong 



Not Strange 

It may seem strange that arithmetics have 
taught and, for the most part, are still teaching 
us to figure profit on cost. It may seem strange 
that the writers of arithmetics have not before 
this conceived the idea of figuring profit on sale, 
as successful business men figure it. It may seem 
strange that they have not seen the successful 
business man's viewpoint; and, when I say suc- 
cessful business man, I mean the man who has 
made a sufiicient study of business and business 
system and administration to figure correctly and 
thru this to build up a large business. 

The Principle New Even to Business Men 

But it must not be forgotten that it is only 
within recent years that business men themselves 
began to figure in this way, and it is not altogether 
strange that arithmetic writers and teachers gen- 
erally should not have gotten hold of the idea 



34 



The Basis of Figuring is Wrong II 

sooner. But they must come to it. Modern busi- 
ness practice demands it. 

The Arithmetic Idea 

With few exceptions, the arithmetics tell us to 
add to cost the per cent of profit we desire to 
make and we shall have the selling price, the cost 
representing 100% and the selling price such per 
cent above as the profit desired represents. 

For example, on a hat costing $2 the merchant 
desires to make a profit of 25%. The arithmetic 
tells him to add 25% to the cost and he will have 
a selling price that will yield him a profit of 25%. 

Far from it. This sort of figuring has misled, 
if not absolutely sent to the wall, thousands of 
business men. 

The Business Idea 

Those who figure and teach in this way do not 
see that it is in the selling that the expense of 
doing business is incurred and that it is on the 
selling price that the expense must be figured, not 
on the cost price. If you buy no goods, you will 
incur no expense in relation to them. But, the 
minute you start the purchase order, the expense 



35 



II Hozv to Figure Profit 

begins and it continues until you deliver the article 
to your customer.. In other words, the expense 
involved is between the point of purchase (the 
price you pay for the article) and your customer 
(the price you receive for the article). 

Distinguish Between Cost and Expense 

Here, a distinction must be made between cost 
and expense, looking at the matter from a busi- 
ness and an accountancy point of view. Cost, of 
course, has different meanings; but for the pur- 
pose of this chapter, it means, in a mercantile busi- 
ness, the price paid at the place of purchase. All 
other outlay in relation to the article which is 
bought and sold we call expense, and this expense 
must be met in selling the article ; that is, we must 
sell the article at a price that will cover this ex- 
pense, as well as the purchase price, and a little 
more, as we shall later see. 

It Does Make a Difference 

So far as the net results are concerned, it may 
seem to the reader that it would make no differ- 
ence whether we figure on cost or on sale, pro- 
vided we figure correctly, provided we know the 



36 



The Basis of Figuring is Wrong II 

basis of our figuring and know what we are doing 
in taking what we take as the basis; provided we 
know that a certain per cent added to a smaller 
number (cost) is not the same per cent of a larger 
number (sale), provided we know the exact cost 
of the goods sold, and provided, further, we wish 
to make enough simply to cover the expense of 
doing business, eliminating the net margin to 
which every business man is entitled. 

We Cannot Get Around It 

But there are too many things to oe overcome; 
and, while it may be possible to overcome them in 
part, yet, no matter how we look at it, in order 
to add a per cent to cost which will produce a 
certain profit, we must first figure on sale; we 
cannot get around it, as we shall later see. 



37 



Ill 

Cost and Expense Defined, Differentiated 

and 
Statistically Grouped 



Cost 



Not Understood, Hence Not Correctly Applied — 
Cost IS not easily defined, since it has different 
shades of meaning, depending upon how it is used 
and the purpose for which it is used. To one 
person it may mean one thing, whereas to another 
person it may mean quite another thing; yet, to 
each, the meaning may be not only clear, but cor- 
rect from his viewpoint. 

Generally speaking, however, the term, as used 
by the masses, while it may seem to be clear, is 
not. That is, different persons using the term do 
not comprehend its meaning in the same light or 
apply it always in the same way; and, as a result, 
they do not all figure correctly and then they 
wonder why it is there should be a difference in 
results under seemingly like conditions. 

Explanation of the Term — In general terms, Cost 
is applied to the price to us of the finished article, 
or to the price plus additional outlay, which may 



38 



Cost and Expense Defined III 

be a single item or a group of items or the sum of 
two or more groups of items. It is comprehen- 
sible, in other words, in the light of price or of 
outlay by stages; that is, it has to do with the 
money value or the outlay at a given point or 
stage; as, in a retail business, at the point of pur- 
chase (Prime Cost), or at the point of delivery 
(Delivered Cost), or at the point of sale (Sub- 
total Cost), and similarly in a manufacturing 
business. 



Different Viewpoints of Cost 

To different persons, and in different businesses, 
and in different stages of the same business, and 
in different uses in each stage, cost has different 
meanings. Therefore, to apply the term correctly, 
we must consider it (1) from the viewpoint of the 
person using the term, or (2) from the viewpoint 
of the business to which we wish to apply it, or 
(3) from the viewpoint of the stage of progress 
in that particular business, or (4) from the view- 
point of the use in the particular stage to which 
it is to be applied, or (5) from the viewpoint of 
the business and the one or ones investing in the 
business, or (6) from the viewpoint of the book- 
keeper and accountant. 



39 



Ill How to Figure Profit 

That of the Person Using the Term 

1. From the Viewpoint of the Person Using 
the Term, Cost means: 

a. To the Consumer, usually, the price paid at 
the place of purchase. 

b. To the Retailer or Wholesaler or Jobber, ( 1 ) 
the price paid at the place of purchase, known, 
in terms of accountancy, as Prime Cost; or (2) 
Prime Cost plus the expense involved in bringing 
the article or articles from the place of purchase 
to the place of sale, known as Delivered Cost; or 
(3) Delivered Cost plus the expense involved in 
effecting the sale and the delivery of the article 
or articles to the purchaser, known as Subtotal 
Cost; or (4) Subtotal Cost plus certain additional 
expense (interest allowed, especially), known as 
Total Cost. 

c. To the Manufacturer, (1) the price paid for 
material and direct labor, known as Prime Cost; 
or (2) Prime Cost plus the expense involved 
in converting the material into salable product, 
known as Manufacturing Cost; or (3) Manufac- 
turing Cost plus the expense involved in delivering 
the article to the purchaser, known as Subtotal 
Cost; or (4) Subtotal Cost plus certain additional 



40 



Cost and Expense Defined III 

expense, known as Total Cost, as in a mercantile 
business. 

d. To the Non-Trader, simply what it costs him 
to conduct or carry on his business, although in 
different businesses of this nature there must 
necessarily be different cost groups, depending 
upon the business. The lines are too varied to be 
taken up in detail here. 

That of the Business 

2. From the Viewpoint of the Bvtsiness, Cost 
may mean one thing in a retail, wholesale or job- 
bing business, another in a manufacturing busi- 
ness and still another in a non-trading business. 
That is, the basis of cost is not the same in these 
different businesses; it is not expressed in the 
same terms or made up of the same elements. 
Therefore, we do not figure it in the same way 
or, necessarily, from the same basis in businesses 
of different kinds or always in different businesses 
of the same kind, since the conditions are not the 
same. 

That of the Stage of Progress 

3. From the Viewpoint of the Stage of Progress 
(cost grouping), Cost in any one business at a 
particular stage may not be made up of the same 
elements as in another business at the same or at 
a corresponding stage; that is, we may have to 



Al 



Ill How to Figure Profit 

take into consideration elements of cost in one 
which do not enter into another; or we may have 
to group differently. In other words, there is 
no set chart or outline which can be followed in 
the same or in a similar stage of progress in all 
businesses of the same kind or of different kinds. 

That of the Use in a Particular Stage 
OF Progress 

4. From the Viewpoint of the Use in a Partic- 
ular Stage of Progress, Cost must be differently 
considered. For example, in a manufacturing 
business, in the factory stage, certain material 
may go into the manufacture of a certain article; 
again, some of the same material may go into the 
repair of certain equipment necessary to produce 
this article; while, again, the piece of equipment 
may become valueless and must be replaced by 
new from this material. 

The same material is applied to these three uses, 
yet different cost elements and cost groups are 
affected by the three different uses to which the 
material is applied. 

That of the Business and the Investor 

5. From the Viewpoint of the Business or Ven- 
ture and that of the One or Ones Investing in the 
Business or Venture, Cost must be differently con- 
sidered. For example : 



43 



Cost and Expense Defined III 

From the viewpoint of the business, ledger costs 
or charges only can be taken into consideration in 
the classification or statistical arrangement of the 
statement. 

But, from the viewpoint of the investor, an 
additional charge or deduction (from earnings) 
should be made in the statement (only) for Inter- 
est on Investment, and the statement which does 
not take this into consideration is not complete, 
whether viewed from the standpoint of account- 
ancy or good business, as we shall later see. 

The cost to the business is the outlay and the 
compensation for this is the earnings, the differ- 
ence being Nominal Net Earnings or Profit. 

The cost to the investor is the forfeiture of the 
interest on the amount which he invests, looking 
at the matter from the viewpoint of what it would 
bring if on secured loan, and the compensation to 
him for this is the Nominal Net Earnings from 
the capital invested as shown by the statement, 
the difference (between the interest and the earn- 
ings) representing a gain or a loss over placing 
his money on secured loan. 

That of the Bookkeeper and the 
Accountant 
6. From the Viewpoint of the Bookkeeper and 
the Accountant, Cost is closely related to Charge, 



43 



Ill How to Figure Profit 

but it does not necessarily mean the same. For 
example : 

a. To the Bookkeeper, Cost suggests a charge 
to some particular account. 

b. To the Accountant, Cost suggests a charge 
not only to a particular account, but to a particu- 
lar group, or class, or section, or division, of ac- 
counts; and this not only as applied to the ledger, 
but to the monthly and yearly statements as well. 

In other words. Cost Charging for record is 
one thing; Cost Grouping for statistical or state- 
ment purposes is another. Both are important 
and necessary to correct figuring and the enlight- 
enment of those financially interested. 

Expense 

Distinguished From Cost — The term Expense, as 
distinguished from Cost, comprehends the individ- 
ual items of outlay entering into or which go to 
increase or to make up each cost group — the item 
or group of items which supplements, adds to or 
increases the price (Prime Cost) or any distinct 
or definite cost group or total following the price. 

For example, at the place of purchase the Prime 
Cost of an article or group of articles may be 



44 



Cost and Expense Defined III 

$50, which would constitute the first cost. The 
additional outlay in bringing the article or articles 
from the place of purchase to the place of sale 
amounts to, say, $1.05, $0.80 being for freight and 
$0.25 for cartage. This outlay we call Expense, 
since it supplements, adds to or increases the 
first cost. The first cost (Prime) and these two 
items of Expense, therefore, while they remain 
detached, retain their distinction or individuality 
as Cost and Expense, respectively; but the minute 
they are grouped together or merged to form a 
second or new cost basis to be increased by addi- 
tional expense outlay of another nature, they lose 
their individual identity and become known simply 
as Cost under an appropriate title, as Merchan- 
dise or Delivered Cost. To this cost (total to this 
point) are added items of outlay or expense enter- 
ing into another group bearing another title or 
name. And so on, the Expense increases and the 
Cost accumulates until the end (Total Cost) is 
reached thru the different stages of cost grouping 
into which the total outlay or charge is divided 
in the conduct 6f a business of whatever kind 
or nature. 

Divisions and Subdivisions of Expense 
Two Classifications — In mercantile, manufactur- 
ing and most other businesses, the items of out- 



45 



Ill How to Figure Profit 

lay or charge or deduction which we call expense 
may be divided into two general divisions, namely, 
Indirect, which means to charge indirectly or 
thru other accounts to Capital Earnings, and 
Direct, which means to charge directly to Capital 
Earnings. Or these items may be divided into 
three divisions, namely. Carrying or Manufactur- 
ing, Operating or Commercial and Direct. This 
analysis implies that Indirect expenses may be 
subdivided into Carrying or Manufacturing and 
Operating or Commercial — Carrying and Operat- 
ing in a mercantile business and Manufacturing 
and Commercial in a manufacturing business. 

Carrying Expense — Carrying expense or charge 
in a mercantile business represents the items of 
outlay which add to or increase the purchase price, 
which add to the cost (Prime) or asset value of 
the merchandise delivered to us. And by some 
this is taken as the basis of cost, rather than the 
purchase price, and may be so taken under certain 
methods of figuring and cost keeping, but not as 
most retail merchants figure or reckon cost. The 
exact expense involved (and no more) should be 
added to the invoice price. 

Expense Follows the Cost Basis — If price is taken 
as the basis of cost, all additional outlay in han- 



46 



Cost and Expense Defined . Ill 

dling the merchanidise (including Carrying Ex- 
pense if so treated) is Indirect expense, but not 
necessarily Operating expense. A distinction, in 
this case, must be made in using these two terms: 
that is, they should not be used interchangeably. 

Indirect Expense — Since Prime Cost is taken as 
the basis by the author, the term Operating as 
distinguished from Carrying will be used rather 
than Indirect. It will not be out of place, how- 
ever, to state that Indirect expenses or charges 
represent items of expense which are deductible 
from Capital Earnings indirectly, that is, thru 
accounts which are necessary to the running of 
the business, regardless of capitalization or how 
conducted, and which in themselves form a group 
charge to be added to a previous Group Total for 
the purpose of forming a new and increased Cost 
Basis or Cost Total. In other words, they repre- 
sent items of expense which are common to all 
businesses of a kind or class. 

Or, again, it may be stated that expenses are 
close, near, vital, to the operations of, or inti- 
mately related to, a business (Indirect) or that 
they are more or less remote or removed (Direct), 
such as interest allowed, which, in this case, is 
the result of operating on limited capital. 

Or, from another viewpoint, it may be stated 



47 



Ill How to Figure Profit 

that Indirect expenses are items of ledger cost 
or charge which find their way to Loss and Gain 
thru such accounts as Fuel, Light, Taxes, Insur- 
ance and similar accounts which are periodically 
closed to Loss and Gain. 

The Natural Divisions — The expense involved in 
the conduct of a mercantile business whose basis 
of cost is the purchase price may be divided, as 
above, into three distinct divisions, namely. Carry- 
ing, Operating and Direct. And it is important 
that the line be clearly drawn between these divis- 
ions. While the first is an element of expense, 
yet it is also an element of merchandise cost. 
In the light or sense of asset value, it bears the 
same relation to merchandise cost that price does. 
These two elements, Purchase Price and Carrying 
Expense, therefore constitute merchandise cost or 
delivered cost, as you choose to call it. 

Operating Expense — The operating expense, the 
outlay involved in the regular course or conduct 
of the business, begins (except as preceded by 
purchasing expense) at the point of receiving the 
goods from the carrier; in other words, at the 
receiving room. It represents the items of ex- 
pense involved in converting the merchandise into 
cash. 

Purchase price and carrying expense are two 



48 



Cost and Expense Defined III 

items of cost and expense, respectively, which are 
common to all mercantile businesses. Revenue is 
not possible in any business without these two 
items. They represent asset value and, together, 
can be turned into money. 

It will be noted, therefore, that Carrying (if 
made a ledger charge) and Operating expenses 
together mean the same as Indirect expenses; that 
is, they are subdivisions of Indirect expense. 

Direct Expenses — Direct expenses, on the other 
hand, are items of charge which are not incident 
to the business, which the business, as a venture, 
as a going concern, does not require or call for, 
but which the management, in a sense, forces upon 
it. And, since they are the result of insufficient 
capitalization (interest allowed, etc.), it would not 
be fair to the earning capacity or power of the 
business to include them with the operating or 
running expenses; in other words, to carry them 
as operating accounts; and, therefore, they are 
made a direct charge to Earnings — posted directly 
to Loss and Gain — or made a separate group by 
themselves (which is the better way) in the Ledger 
and in the Statement and independently charged, 
thru Loss and Gain, to Capital Earnings. They 
are made a charge group distinct from the Oper- 
ating expenses in order to determine what the 



49 



Ill How to Figure Profit 

business, under favorable conditions or, in com- 
parison with other businesses of a Hke nature, is 
capable of producing. 

Direct expenses are incurred, then, because of 
certain conditions which exist in certain busi- 
nesses, but which do not exist in certain other 
businesses of the same kind or class as do Operat- 
ing expenses. 

In a mercantile business, therefore. Indirect ex- 
penses or charges are subdivided into Carrying 
(if made a ledger charge) and Operating (or 
Commercial, which means the same) ; and, in a 
manufacturing business, into Manufacturing and 
Commercial. 

What Carrying Expenses Include — Carrying ex- 
penses (Freight, Express, Cartage and Parcel 
Post — In) represent the expense incurred between 
Prime Cost and Delivered Cost and form a distinct 
cost group (part of merchandise cost), bearing 
no more relation to operating expenses than do 
Direct Charges. These two groups of expenses 
(Carrying and Direct) should be kept separate 
and apart from the operating expenses in a mer- 
cantile business. 

Operating Expenses in Three Divisions — Operating 
or Commercial expenses in mercantile businesses 
may be subdivided into Purchasing, Administra- 



50 



Cost and Expense Defined III 

tive and Selling. They represent the expenses 
incurred between Delivered Cost and Subtotal 
Cost. 

In manufacturing businesses, there may be two 
divisions of expense following Manufacturing 
Cost, namely, Administrative and Selling — not 
including Direct Charges; that is. Commercial 
Expenses may be so divided or subdivided. 

Expense Grouping — Dividing and subdividing ex- 
penses in this way we call Expense Grouping, each 
group representing a distinct element of charge 
or cost to be added to a preceding division of Cost, 
as where Carrying expenses are added to Prime 
Cost to get Merchandise or Delivered Cost; Oper- 
ating or Commercial expenses to Delivered Cost 
to get Operating or Subtotal Cost, and Direct 
Charges to Subtotal Cost to get Total Cost. 

Statistical or Statement Divisions of 

Expense 

Mercantile Manufacturing 

Business: Business: 

1. Indirect: 1. Indirect: 

a. Carrying(if made a. Manufacturing 

a ledger charge) b. Commercial: 

b. Operating or (a) Administrative 
Commercial: (b) Selling 



51 



Ill How to Figure Profit 

(a) Purchasing 2. Direct 

(b) Administrative 

(c) Selling 
2. Direct 

It should not be implied that an analysis so 
minute as the above is necessary in every business 
or in any business. Three divisions will usually 
answer in a mercantile business, namely, Carry- 
ing, Operating and Direct; and three divisions 
also in a manufacturing business, namely. Manu- 
facturing, Commercial and Direct. 

Divisions of Cost 

Mercantile Business 

Cost, as previously explained, is divided into 
totals or group totals and is known and referred 
to by group titles; as, for example. Purchase or 
Prime Cost, Merchandise or Delivered Cost, Oper- 
ating or Subtotal Cost and Total Cost, depending 
upon the basis taken and the purpose for which 
taken. 

The purchase price, or Prime Cost, and the first 
subdivision of Indirect expense (Carrying) con- 
stitute, as above stated, what we call Merchandise 
or Delivered Cost, which means the cost at our 
store or place of sale — the asset value of the goods 



52 



Cost and Expense Defined III 

or stock. Add to this the second subdivision of 
Indirect expense (Operating or Commercial, as 
you please to call it) and we shall have Operating 
or Subtotal Cost; add to this the Direct Charges 
and we shall have Total Cost, which means the 
total ledger cost involved in the conduct of our 
business — interest on investment not included, 
although deductible in the statement before a net 
profit is possible from the viewpoint of the one 
or ones investing in the business. 

It will be seen therefore that the term Cost, as 
applied to a mercantile business, may mean one of 
four or more things, depending upon the view- 
point and the accountant's idea of grouping. 
Manufacturing Business 

In a manufacturing business, we have the same 
divisions, and the same titles, with one exception, 
namely. Manufacturing Cost, which we use here, 
as is noted below, instead of Merchandise or De- 
livered Cost, as in a mercantile business. 

For example, what we pay for the raw material 
plus the direct labor put upon this material we call 
Prime Cost; add to this the freight and cartage 
and all other expenses involved, directly or indi- 
rectly, in purchasing or in converting the raw 
material into the finished product and we shall 
have Manufacturing Cost, which, in a measure, 



53 



Ill How to Figure Profit 

corresponds to Delivered Cost in a mercantile 
business. Add to this another group of expenses 
(Commercial) and we shall have Subtotal Cost. 
Add to this still another group of expenses or 
charges (Direct) and we shall have Total Cost, 
as in a mercantile business. 

If the records are properly kept in a manufac- 
turing business, the cost of manufacturing a given 
article can be determined very accurately, as can 
also the cost of selling the article. 

In either a mercantile or a manufacturing busi- 
ness, it is absolutely necessary to know the cost 
or what cost means, whatever we take as the basis, 
in order to figure intelligently. 

Statistical or Statement Divisions of Cost 

Mercantile Manufacturing 

Business: Business: 

1. Prime Cost 1. Prime Cost 

2. Merchandise or De- 2. Manufacturing Cost 
livered Cost. 3. Subtotal Cost 

3. Operating or Sub- 4. Total Cost 
total Cost. 

4. Total Cost 

Of course, looking at the matter in the light 
of accountancy or statistical grouping there may 



54 



Cost and Expense Defined III 

be other divisions and subdivisions of cost; but, 
for the purpose of this book, for the purpose of 
estabHshing the selHng price, and indeed for any 
purpose, for that matter, consideration need be 
given only to the four divisions mentioned. 

The Basis of Cost 

To avoid confusion in the use of the term Cost, 
a distinction should be made between Ledger Cost 
or Charge and Statement Deduction. The basis 
of Ledger Cost in a mercantile business is or 
should be Prime Cost, and, in a manufacturing 
business. Manufacturing Cost. 

The basis of Statement Deduction may be any 
one of the four divisions in the preceding analysis 
or more, depending upon the purpose for which 
the basis is taken; but, contrasted with ledger 
charge. Nominal Net Profit is the basis. 

Although freight and cartage and similar charges 
on unsold goods represent an asset and form a part 
of the cost of the goods in a financial statement, 
or in settling with an insurance company for a 
loss, or in selling the entire stock at what it would 
cost to duplicate the stock laid down in the store; 
yet this cost, or, more properly, expense, would 
better not be added to the Purchase Price of 



55 



Ill How to Figure Profit 

merchandise in the ledger as incurred, but made 
a separate charge, and added to merchandise 
cost weekly or monthly, as explained in Chapter 
XXIV — unless it is added to the invoice price, 
thus making delivered cost the basis. 

When reference is made to selling or doing busi- 
ness at a profit or on an even basis or at a loss, 
Total Cost is the basis which should be under- 
stood, except when the selling price must be taken 
into consideration to determine the per cent of 
loss, as explained in Chapter XIII. 

A distinction should be made, therefore, be- 
tween selling above cost and selling at a profit. 
In selling above cost you may be selling at a profit 
or at a loss, depending upon the per cent of profit, 
as explained in Chapter XIII. 

So also a distinction should be made between 
selling below cost and selling at a loss. To sell 
at a loss does not mean necessarily to sell below 
cost. You will be selling at a loss if you sell at 
cost, an3 you may be selling at a loss even though 
you sell above cost, as is explained in Chapter 
XIII; that is, you may be selling at a reduction 
of profit as shown by the marked-up price. 

Use and Apply Expense Terms Correctly 

In referring to expense in terms of accountancy, 
note: 



36 



Cost and Expense Defined III 

1. That the terms Carrying, Transportation and 
Trading mean the same in a mercantile business. 
Any one of these terms may be used as applying 
to Freight, Express, Cartage and Parcel Post — In. 

2. That the terms Operating and Commercial 
mean the same in a mercantile business. They 
constitute the group or groups of expenses be- 
tween Delivered Cost and Total Cost. They may, 
as previously stated, be subdivided into three dis- 
tinct groups, namely. Purchasing, Administrative 
and Selling; but, ordinarily, it is not necessary 
or advisable to make these subdivisions. The 
expenses in most mercantile businesses need be 
divided into only three groups, namely. Carrying, 
Operating and Direct. 

In a manufacturing business, the term Operat- 
ing has too wide a range of meaning to be used 
as applying to the expenses following Manufac- 
turing Cost. The term Commercial is a more 
appropriate one to use. 

As in a mercantile business, only three divisions 
of expense need be made, namely, Manufacturing, 
Commercial and Direct, the former being to Raw 
Material and Productive Labor what Carrying 
Expense is to Purchase Price in a mercantile busi- 
ness (See Chapter IV). ^ 



§r 



Ill 



How to Figure Profit 



3. That the terms, Direct and Extraordinary 
mean practically the same in any business, and 
apply especially to interest allowed. The term 
Direct is the more applicable perhaps, especially 
if followed by the word Charges. 



58 



IV 



Cost Analysis of Manufacturing and 
Mercantile Businesses 



Manufacturing 

The Business is Varied — The business of manu- 
facturing, like that of merchandising, is varied. 
It has reached the point of extreme specialization. 
Business men have come to see that it is in the 
specialties that money is made. They no longer 
take the timber from the stump, for example, and 
deliver it in the form of furniture to the home. 
A factory is equipped now for a distinct line of 
work or set of operations with quality or volume, 
the objective. 

Three Elements Enter Into Manufacturing Cost — 

The manufacture of any article or line represents 
three distinct elements or divisions of cost, namely, 
Raw Material, Productive Labor (these two consti- 
tuting Prime Cost) and Manufacturing Expense. 
These three elements constitute Manufacturing 
Cost, or the cost to manufacture, and the line 
should be drawn here, as it would be if the manu- 



59 



IV How to Figure Profit 

factured articles were purchased from another 
plant in the regular course of merchandising — 
Merchandise or Delivered Cost. 

In other words, Manufacturing Cost is to a 
manufacturing business what Delivered Cost is 
to a mercantile business, except that the cost to 
manufacture an article in a given line for sale 
should be less to the manufacturer than the De- 
livered Cost of the same article from another 
plant in the same line, because Delivered Cost 
to the buyer includes a gross profit to the seller 
(sufficient to cover the Commercial and Direct 
expenses, Interest on Investment and a Net 
Profit) ; otherwise the seller would not be in 
the manufacturing business — if he knows how to 
figure profit. 

Other Divisions of Cost — But the above has to do 
with manufacturing or production cost only. It 
does not include the cost of administration and 
selling, which we call Commercial Expense or the 
cost which we call Extraordinary Expense or 
Direct Charges, should such expenses or charges 
be incurred. 

The Commercial Expense added to Manufactur- 
ing Cost will give what the author chooses to call 
Subtotal Cost — See Figure 1 following. 

Add to this the Direct Expenses (which will 



60 



Cost Analysis of Manufacturing IV 

give Total Cost) and Interest on Investment (See 
Chapter XXVI) and the Net Profit you desire to 
make and you will have the Selling Price, the 
price at which the article should be sold, as in a 
mercantile business. 

The Different Cost Divisions Explained — Figure 1 
will help to fix the divisions of cost, the deduc- 
tions, net profit and selling price clearly in your 
mind. 

While this diagram is intended to portray a 
manufacturing business, it also portrays a mer- 
cantile or selling business, Manufacturing Cost 
corresponding to Delivered Cost in a mercantile 
business, and from this point on there is practi- 
cally no difference; both are selling businesses. 

In a manufacturing business. Manufacturing 
Expenses and Commercial Expenses should not 
be confused. 

Neither should Manufacturing Cost and Sub- 
total or Total Cost be confused. The cost to 
manufacture and the cost to sell are two distinct 
groups of cost. They do not mean the same in 
considering the matter of cost and should not be 
used interchangeably. 

And do not confuse Total Cost with Total De- 
ductions. 

Total Cost means the total ledger outlay in- 



61 



IV How to Figure Profit 

volved in the conduct of a business, or the total 
charges against or deductions from earnings as 
shown by the ledger. 

The total cost of doing business is deducted 
from the total earnings resulting from the con- 
duct of the business; and, from the remainder, 
what is left, an additional deduction is made 
of the interest on the investment (See Chapter 
XXIII), which, together with previous deduc- 
tions, constitutes Total Deductions — Figure 1. 

The top squares in the diagram (Figure 1), 1 
to 5 inclusive, are intended to show the respective 
per cents (or total) of profit which the margin 
between Prime Cost and Selling Price represents; 
in other words, the profit which must be made on 
every dollar's worth of goods sold in order to do 
business on a sound or safe basis. 

The Basis of Cost — Therefore, fiyi your basis of 
cost — Prime, Manufacturing, Subtotal or Total — 
and then go ahead intelligently wuth your figuring 
according to what you desire to accomplish thru 
figuring. If your purpose is to establish the sell- 
ing price, however, take Manufacturing Cost as 
the basis. 



^2. 



Cost Analysis of Manufacturing 



IV 









net 

PROFIT 

(5) 


SELLING 
PRICE 






1 


INTEREST 

ON IN- 
VESTMENT 

(4) 


TOTAL 
DEDUC- 
TIONS 

(g) 








DIRECT 
CHARGES 

(3) 


TOTAL 
COST 

OF 

SALES 

AND 

OTHER 

EARNINGS 

(0 






COMMER- 
CIAL- 
EXPENSES 

(2) 


SUBTOTAL 
COST 

OF 
SALES 

(e) 




MANUFAC- 
TURING 

expenses 

(0 


MANUFAC- 
TURING 
COST 

OF j 
SALES 

(d) 


PRODUC- 
TIVE 
LABOR 

(a) 


PRIME 
COST 

OF 
SALES 

(c) 


RAW 
MATERIAL 

(b) 


Ledger Charge oa Deduction 


"Statement; 
"Deduction 


Frice 



Figure 1 
Note — This Diagram Shows the Grouping of 
Costs, Charges and Net Profit in a Manufacturing 
Business with a View to Fixing the SelHng Price. 



63 



IV How to Figure Profit 

Figure 1 Explained 

The small squares at the top of this diagram, 
numbered, respectively, 1, 2, 3, 4 and 5, represent 
the respective divisions of profit which must be 
made on every dollar's worth of goods sold to 
meet the ends for which the business is established 
and for which the investment is made. 

The amount of each of the first four groups, 
in dollars and cents, for, say, one year or one 
month or one week should be ascertained from 
your books or from as close an estimate as you 
can make if you do not keep a set of books. 

Each amount so ascertained, or the sum of the 
respective amounts, should be divided by the total 
sales for the same period of time and the result 
will be the per cent to sale. To this per cent add 
the per cent represented by number 5 and you will 
have the average per cent of profit which you 
should make on sale. 

Now, add the equivalent of this per cent (the 
per cent added to the smaller number. Cost, which 
will produce this per cent on the larger number. 
Sale — Chapter XIX) to Manufacturing Cost and 
it will give you the correct selling price. 

Beginning with "Prime Cost" (c), this diagram 
illustrates also the grouping of costs in a mercan- 
tile business — Figure 2, following, which see. 



64 



Cost Analysis of Manufacturing 



IV 











NET 












PROFIT 












(5) 






INTEREST 










ON IN- 












VESTMENT 












(4) 








DIRECT 








CHARGES 












(3) 


TOTAL 
COST 

OF 
SALES 


TOTAL 
DEDUC- 
TIONS 


SELLING 
PRICE 




OPERATING 
OR COM- 
MERCIAL 






EXPENSES 

(2) 


OPERATING 
OR 


AND 
OTHER 








SUBTOTAL 

COST 

OF 


EARNINGS 






CARRYING 


MERCHAN- 


EXPENSES 


DISE OR 
DELIVERED 


SALES 








(1) 


COST 
OF 












SALES 










PRIME 












COST 












(c) 


(d) 


(e) 


(0 


(8) 


(h) 


Ledger C 


"harge or C 


)eduction 


Statement 


Deduction 


Price 



Figure 2 

Note — This Diagram Shows the Grouping of 
Costs, Charges and Net Profit in a Mercantile 
Business with a View to Fixing the Selling Price. 



65 



IV How to Figure Profit 

The cost terms used in this diagram and the 
divisions of cost are fully explained in Chapters 
III and XXIII. 

Referring to Total Cost (f), in almost every 
business, in addition to the earnings resulting 
from sales, there are earnings resulting from dis- 
counting bills (Cash Discount) and from interest 
on notes taken on account or in lieu of cash 
(Interest Earned), etc. Hence the Total Cost 
represents a deduction from "Sales and Other 
Earnings". 

The explanation of Total Deductions (g) given 
above will be found sufficiently clear for the pres- 
ent. Chapter XXIII takes up this division more 
minutely. 

Mercantile 

Wherein They Differ — The essential difference 
between a mercantile and a manufacturing busi- 
ness lies in the fact that the mercantile business 
buys the goods or articles which it sells and in 
the same form or state in which it sells them, 
except as to quantity or bulk, whereas the manu- 
facturing business makes or produces them; that 
is, it buys the raw material and converts it into 
the product which it sells. Both are selling busi- 



66 



Cost Analysis of Manufacturing IV 

nesses, but one is exclusively so, buying the iden- 
tical thing or things which it sells, whereas the 
other manufactures or makes from raw material 
that which it sells. In other words, the chief 
business of the one is to sell goods; of the other, 
to manufacture goods. 

Another point of difference, however, lies in the 
fact that, in a manufacturing business, manufac- 
turing cost, which includes freight and cartage, 
is taken as the basis of cost, whereas, in a mer- 
cantile business, prime or purchase cost is usually 
taken as the basis, freight and cartage being 
carried as a separate charge, although forming a 
part of merchandise cost, and reduced in propor- 
tion to sales or added to merchandise cost weekly, 
the latter being the better way. 

Divisions 

Mercantile businesses may be 3ivided into Gen- 
eral, Specialty and Department, the difference 
being simply in classification and magnitude. Or, 
from another point of view, and as will be ex- 
plained in another chapter, these businesses may 
be divided into Independent, Dependent and Inter- 
dependent. 

A General Mercantile Business, or General Store, 
as it is called, is one which carries a small quantity 
of different lines of merchandise. Such a store 



67 



IV How to Figure Profit 

may be found in small hamlets or towns and in the 
outskirts of large towns or cities. The general 
store, however, as formerly conducted, is coming 
to be a thing of the past. 

A Specialty Business is one which carries a dis- 
tinct or exclusive line on a large scale, as furni- 
ture or clothing or furnishings or groceries or the 
like. Such businesses are springing up rapidly 
in medium-sized and large towns and cities. This 
may properly be termed an Independent business. 

A Departmentized Business, or Department 
Store, or Interdependent business, as it may prop- 
erly be called, is a combination of two or more 
specialty or independent businesses on the same 
large or even larger scale, each specialty being 
considered a department or store in itself. 

These businesses vary in number of departments 
from two to three in a small city to one hundred 
or more in some of our large cities, different per- 
sons having different ideas as to departmentiza- 
tion aside from economic or other reasons. Even 
a so-called specialty business may be subdivided or 
departmentized. Departmentization is a business 
study, and, as a business grows, departmentization 
grows with it. The extent to which one should 
departmentize will depend upon the nature and the 
magnitude of his business. 



68 



Cost Analysis of Manufacturing IV 

Regardless of the kind of business, the cost 
analysis will be as shown in Figure 2, which see. 

A comparison of this with Figure 1, preceding, 
will show the similarity of the selling ends of the 
two businesses. 

The explanation of the diagram (Figure 1) will 
also apply to Figure 2. 



69 



V 



Confusion of Cost Elements Must be 

Avoided 



Manufacturing Business 

As stated in Chapter III and shown in Figure 
1, Chapter IV, the two elements which enter into 
Prime Cost are Raw Material and Direct Labor. 
No matter what be the line manufactured, or 
whether the business be small or large, these two 
elements constitute Prime Cost. 

But, in different businesses, the per cent of the 
one element to the other differs. In one business 
the raw material may be the large item; whereas, 
in another, the direct labor may be the large item. 
But, in any manufacturing business, only these 
two items enter into Prime Cost. All other items 
of outlay must be treated as Expense. 

But it is possible to confuse raw material with 
factory supplies and other items properly classed 
as expense. Raw material is that which is present 
in and becomes a part of the finished product, that 
which gives it shape and size and appearance and 
quality; but not the elements used in developing 



70 



Avoid Confusion of Cost Elements V 

shape and size and quality, as oil, grease, rags, 
fuel, light, etc. These are classed as expense. 

So also it is possible to confuse direct or pro- 
ductive labor with indirect or non-productive labor. 
Direct labor, as an element of Prime Cost, is that 
which directly changes the raw material into the 
finished product, as distinguished from indirect 
labor, which merely assists, as superintendent, 
foreman, fireman, engineer, janitor, watchman and 
like service. These must be classed under indirect 
labor, and this in turn under Manufacturing Ex- 
pense (Chapters III and XXIII). 

Therefore, in distinguishing Prime Cost from 
Expense, in a manufacturing business, the line 
must be clearly drawn between that which is direct 
and that which is indirect in order to insure cor- 
rect figuring. 

Mercantile Business 

In a mercantile business, as has previously been 
explained, only one element is present in Prime 
Cost, namely, purchase price. All other elements 
of outlay are expense or charge, whether Carry- 
ing, Operating or Direct or some subdivision or 
modification of these. 



71 



VI 



Raw Material and Finished Product 
Differentiated 



The state or condition in which one receives 
material is raw; that in which he parts with it is 
finished. Therefore, finished product to the seller 
may be raw material to the buyer. 

For example, if a person's business be that of 
buying timber in the stump and selling it in 
the log, to him the stump will be raw material, 
whereas the log will be finished product. 

The person who buys these logs may be a lum- 
ber manufacturer. To him the logs will be raw 
material, whereas the lumber into which the logs 
are sawn will be finished product. 

The person who buys this lumber may be a 
furniture manufacturer. To him the lumber will 
be raw material, whereas the furniture will be 
finished product. 

The person who buys the furniture sells it in 
the same form as he buys it. He is therefore a 
merchant, not a manufacturer, and the one who 
buys of him does so for his own use and is there- 
fore a consumer. 



72 



Raw Material and Finished Product VI 

Thus you will note the stages or processes 
between the producer and the consumer. You 
will note also the value which each process adds 
to the material in its original or raw state and the 
proportionate increase of cost to the buyer. 

The process of converting the raw material into 
finished product we call manufacturing. This pro- 
cess may be either hand or factory. The hand 
process has given way largely to the factory pro- 
cess, due to the invention of machinery, which 
makes possible not only better work, but a greater 
volume as well. 



n 



VII 

Some Conditions Which Affect Cost 

and Profit 



The Middleman 

It must be clear even to the inexperienced that 
the more hands thru which an article passes in 
its finished stage before reaching the consumer, 
the higher the price to the consumer, since each 
one must make a profit. This does not mean that 
the price to him would be less if he bought first- 
hand while the middleman remains, for the man- 
ufacturer or the producer, as the case may be, 
knows the number of hands thru which the arti- 
cle should pass before reaching the consumer and 
about the price at which it would be finally sold, 
and he must of course protect the trade — his best 
customers, those who buy of him in large quanti- 
ties — and if he sells to consumers at all, it will 
be at an increased price from that made to large 
buyers. But most manufacturers and wholesalers 
will not sell direct to consumers at any price. 

In Theory 

In theory, the manufacturer buys from the pro- 
ducer ; the wholesaler from the manufacturer ; the 



74 



Conditions Which Affect Cost and Profit VII 

retailer from the wholesaler, and the consumer 
from the retailer; but, in practice, conditions are 
quite different, and it is of the practical side of 
business that this book treats. 

In Practice 

In practice, the manufacturer buys from the 
manufacturer or from the producer, depending 
upon what he buys ; the wholesaler from the man- 
ufacturer or from the producer; the retailer from 
the wholesaler, from the manufacturer or from 
the producer, depending upon the line carried and 
the volume; and the consumer from the retailer, 
from the manufacturer or from the producer, 
depending upon the nature of the thing bought 
and whether the manufacturer sells direct or thru 
middlemen. 

The Sale Price 

With some sellers, whether they be producers, 
manufacturers or wholesalers, the sale price is 
uniform and made to a particular class of custom- 
ers; whereas, with others, the sale price varies 
according to volume, whether the buyer be a 
manufacturer, a wholesaler or a retailer; that is, 



75 



VII How to Figure Profit 

prices are quoted on a basis o£ quantity, but the 
average price, even the price made to the heaviest 
buyers, must be high enough to yield a satisfac- 
tory gross profit from the viewpoint of expense 
and net profit to sale. 

The Price May or May Not Vary 

In other words, the price will or should be about 
the same to all buyers in the retail trade within 
the limits of a certain volume of business and for 
the same grade of goods; and hence the price 
which they, in turn, make to their customers will 
or should be about the same. Their expense of 
doing business may vary slightly, but the differ- 
ence will be so small in rightly managed businesses 
as to make a variation in price to their customers 
impossible without cutting into profit, volume-buy- 
ing considered. 

Therefore, it will be seen that, within a certain 
volume of business and upon a basis of the same 
grade of goods, the price to retail buyers will be 
about the same in all businesses of a given line; 
and, since this is true, volume considered, the price 
which they, in turn, make will be about the same 
if a uniform profit is to be made. If a fixed, 
definite profit for a definite purpose is not con- 



re 



Conditions Which Affect Cost and Profit VII 

sidered, then there may be a variation in the 
price; as where one merchant attempts to under- 
sell another, or where the price is fixed by guess, 
as is often the case, or as a result of figuring on 
a wrong basis. 

When the price to retail buyers varies accord- 
ing to volume, the larger the volume the larger 
the profit or the lower the price which the retail 
buyer, in turn, can make (expenses being equal), 
provided volume-buying does not mean over-stock- 
ing or over-capitalizing or both. Stock must be 
turned promptly to make the investment profit- 
able. Therefore, the buying end of a business 
needs the same attention, judgment and skill as 
the selling end. 



77 



VIII 
It Makes a Difference How We Figure 



The Basis Must Be Established 

In a mercantile business, the relation which 
cost bears to sale depends entirely upon the view- 
point — upon what we, as explained in Chapter 
III, take as the cost basis. If our idea of cost 
be the price we pay for an article (Prime Cost), 
that is one thing; if Delivered Cost, that is an- 
other; if Subtotal Cost, that is another, and, if 
Total Cost, that is quite another. 

The basis of cost, therefore, must be established 
and our reason for establishing this particular 
basis rather than some other basis must be not 
only clear, but right before we begin to figure. 

If we establish Prime Cost as the basis, as in 
fixing the selling price in a mercantile business, 
we must add to this the expense of doing business 
in order to arrive at the cost of doing business. 
Make a distinction between the expense of doing 
business and the cost of doing business (Chapter 
III, preceding), and do not forget that the expense 
of doing business is figured on Sale, not on Cost. 



78 



It Makes a Difference How We Figure VIII 

Add The Equivalent to Cost 

In arriving at your figures, you must ascertain 
the relation which the expense of doing business 
bears to Sale, not to Cost. And bear in mind that 
the per cent thus arrived at is not the one to be 
added to Cost to get the cost of doing business, 
but the equivalent, the per cent which, if added 
to Prime Cost, will produce the per cent shown 
by the relation of expense to sale. In other words, 
divide the per cent of gross profit by the per cent 
of cost and the result will be the per cent (equiv- 
alent) to add to cost. (Chapter XIX). 

For example, if it is found that the expense 
to sale, arrived at by dividing the expenses for 
a given period by the sales for the same period, 
equals 20%, which must be gotten first, the ex- 
pense to Prime Cost, arrived at by dividing the 
expenses for a given period by the Prime Cost 
for the same period, will equal 25%. This may 
be proved by taking any article at any price and 
adding to it 25% of the cost price and the amount 
so added will be 20% of the sum of the two or 
the selling price. 

Take a hat costing $1 and add to this cost 25% 
(%) and you will have a selling price of $1.25. 
Now, the amount added ($0.25) is only 20% of 



79 



yill How to Figure Profit 

the sum of the two items — $1 plus $0.25; that is, 
207o of $1.25 is $0.25. 

Find the Expense to Sale 

But, you say, since this is true, why not add 
25% to prime cost at once and thus figure on cost 
and not take the 20% on sale into consideration 
at all? Theoretically, this would work, as most 
problems in arithmetics are worked, but, practi- 
cally, it would not. Since the expense of a busi- 
ness is incurred in doing business, in selling, in 
delivering the article from the place of purchase 
to the consumer, the expense to sale must be estab- 
lished before the expense which is to be added to 
prime cost can be determined. If the required 
profit on sale were always 20%, then we would 
always add to prime cost 25%; but, even so, it 
must not be forgotten that the per cent added to 
prime cost is the result of the relation of expense 
to sale, hence the per cent of expense to sale 
must first be determined. No matter how we 
look at it, we must first get the per cent which 
the expense of doing business bears to sale. 

The Per Cent of Profit Not Uniform 

It is not a fact, in any business, that a uniform 
per cent should be added to prime cost or that a 



80 



It Makes a Difference How We Figure VIII 

uniform profit can be made on sale. As stated 
in another chapter, the selHng price is fixed by 
supply and demand, or by competition, or by the 
selling qualities of the article, correct figuring 
assumed. But, in any case, if the selling price 
cannot be so fixed as to permit of a reasonable 
profit, either the prime cost or the expense of 
doing business must be reduced (if reduction be 
possible thru good buying and good management) 
or a line that will produce a reasonable profit sub- 
stituted. 

It is the Average Profit Which Counts 

This does not mean that articles whicH will not 
yield a reasonable profit should not be carried 
in stock, but that the total sales should yield a 
reasonable profit. The prime cost of a half 
dozen articles may be the same, regardless of 
the business, yet they may sell at different prices, 
depending upon the selling qualities of each. This 
does not mean that only the article bringing the 
highest price should be carried in stock. They 
may all be necessary to a successful business, but 
the good seller (price as well as demand) must 
bring the poor seller (sale price) up to a point 
where the average of the two will yield a reason- 
able profit. 



81 



VIII How to Figure Profit 

Again, the selling price of a half dozen articles 
may be the same and yet the prime cost not the 
same, but a satisfactory profit is necessary to a 
successful business. 

Large Buyers Have An Advantage 

If the Prime Cost is to be reduced, it will ordi- 
narily be thru volume-buying. This may or may 
not mean buying direct — cutting out the middle- 
man. 

A retail merchant may buy direct if he can 
buy in large enough quantities, but this means 
increased sales — a larger business. Hence, the 
large city merchants can buy to better advantage 
than the country merchants, and, by reason of 
this, sell at a lower price and the same per cent 
of profit, or at the same price and a larger per 
cent of profit; and, in either case, they can make 
more money (a larger volume), since a lower 
price means increased sales and more rapid turn- 
ing of investment or, the same price, larger profits. 

Another advantage which the city merchant has 
over the country merchant lies in the fact that he 
can replenish his stock daily or several times a 
day if he needs to and thus conduct his business 
on a smaller investment and turn his stock more 
rapidly. 



82 



IX 



Profit Defined and Methods of Figuring 

Explained 



Definition and Explanation of Profit 

Every business conducted for the purpose of 
making money yields on every dollar's worth of 
goods sold what we call a profit, which means sale 
over cost. 

Definition — Profit, therefore, in a Mercantile 
business, subject to the modification mentioned 
in the next paragraph, is the margin or differ- 
ence between Prime Cost and Selling Price or, 
in a Manufacturing business, between Manufac- 
turing Cost and Selling Price. 

Explanation — ^The right to use the term profit 
in this sense, however, without qualification, may 
be questioned, since it admits of three construc- 
tions, namely. Gross, Nominal Net and Net; and, 
hence, because of the possibility of misconstruc- 
tion or misunderstanding, it is deemed best to 
qualify the word profit by prefixing Gross, Nom- 
inal Net or Net, as the case may be, whenever 
doubt or confusion might otherwise arise. 



83 



IX How to Figure Profit 

Sale over Cost, then, regardless of what we 
take as the cost basis, we shall hereafter desig- 
nate as Gross Profit, Nominal Net Profit or Net 
Profit, as the case may be. 

Taking Prime or Manufacturing Cost as the 
basis, the items of outlay or charge intervening 
between this and Total Cost are, as explained in 
Chapter III, Expense, which, in a mercantile busi- 
ness, is subdivided into Carrying, Operating and 
Direct, the second, in turn, being subdivided into 
Purchasing, Administrative and Selling, or at 
least it may be so subdivided. 

The important thing here, however, is to dis- 
tinguish between Cost and Expense and to de- 
termine how much of Gross Profit (the margin 
between Prime Cost and Selling Price) each 
division of expense consumes. 

While the margin between Prime Cost an3 Sell- 
ing Price remains intact, subject to reduction from 
the viewpoint of ledger charge, we call it Gross 
Profit. As deductions are made for the respec- 
tive expense group charges, this margin of Gross 
Profit becomes smaller and smaller until the last 
deduction (Direct Charges) is made, when what 
remains becomes known as Nominal Net Profit, 
all ledger burden or cost having been eliminated 
or deducted. 



84- 



Profit Defined; Methods of Figuring Explained IX 

The Margin of Profit Not Always Sufficient — Of 

course, it is not always true that the margin of 
gross profit is sufficiently large (and in too many 
cases it is not) to meet the demands made upon 
it by the numerous deductions of expense cost, 
much less to include a margin of Nominal Net 
Profit, which means, as above stated, free or clear 
of all burden or weight from the viewpoint of 
Ledger charge. 

But, in a rightly conducted business, under nor- 
mal conditions, there will be a margin of Nomi- 
nal Net Profit, from which a Statement deduction 
should be made for Interest on Investment, leaving 
a margin which we call Net Profit, profit in fact 
as well as in name, that is, from the viewpoint of 
the investor or investment. 

The Basis of Figuring Not the Same in All Busi- 
nesses — Whereas, in a manufacturing business, 
Gross Profit is the margin or difference between 
Manufacturing Cost and Selling Price, in a mer- 
cantile business, it is the margin or difference 
between Prime Cost and Selling Price; or, if 
Merchandise Cost is taken as the basis (as it may 
be after the selling price and the expense to sale 
have been established and the carrying expense 
has been closed to Merchandise), between that 
and Selling Price. 



85 



IX How to Figure Profit 

In other words, Gross Profit is the margin be- 
tween the cost and selling price of the finished 
article or product, that which is carried or han- 
dled in the usual course of trade, whether pur- 
chased or manufactured. 

In a mercantile business, the prime cost stage 
represents the article as finished, though not ready 
for sale or delivery to the customer, since it must 
first be "carried" or brought to the place of sale. 

In a manufacturing business, the article or 
product at the prime cost stage is not finished. 
As a matter of fact, prime cost in a manufactur- 
ing business does not represent a distinct stage of 
progress, but rather, elements of cost distinct from 
that which we call expense. The article in process 
does not reach the salable stage until the process 
of manufacture, thru the blending of the three 
elements of charge we call Raw Material and 
Productive Labor (Prime Cost) and Manufactur- 
ing Expense, is completed. 

For the purpose of fixing the selling price, 
therefore, the cost basis in a manufacturing busi- 
ness should be Manufacturing Cost and, in a mer- 
cantile business. Prime Cost. 

Methods of Figuring Profit 

In a mercantile business, therefore. Gross Profit 



86 



Profit Defined; Methods of Figuring Explained IX 

means, as previously stated, the difference between 
Prime Cost and Selling Price. 

For example, if you buy hats at $3 each and 
desire to make a gross profit of $1, you will sell 
them at $4. 

The gross profit here is $1, the difference be- 
tween the price you pay for the hats and the price 
at which you mark them for selling. You simply 
add $1 to the cost price and it gives you the sell- 
ing price. In other words, you add 33^/3%, or %, 
to the cost price in this case and it gives you the 
selling price of $4. 

Amount Definite and Per Cent Definite Not the 
Same — This is exactly the thing to do if the de- 
sired gross profit be $1, but it is not the thing to 
do if the desired gross profit be 331/3%. There 
is a difference between making a gross profit of 
$1 and making a gross profit of 2>2>y^%, While 
they appear to be the same, they are not. 

If you are thinking simply of fixing the selling 
price at a certain amount, you add an amount 
to prime cost which will equal the selling price 
desired, and it is immaterial whether you do this 
arbitrarily or by percentage. 

For example, if an article costs $1.50 and you 
wish to sell it for $2.25, you simply add $0.75 to 



87 



IX How to Figure Profit 

the cost price, or you may add 50% to the cost 
price and you will get the same result. 

But, when you speak of making a certain profit, 
you must look at the matter differently; and here 
you must distinguish between making an amount 
definite and making a per cent definite. 

If you wish to make $0.75 gross profit, you will 
simply add $0.75 to the cost price; but, if you wish 
to make 50% gross profit, 50% added to prime 
cost will certainly not produce the gross profit 
you desire. In other words, there is a difference 
between adding 50% and making 50%. To add 
50% means simply to add I/2 ^^ prime cost; that 
is all there is to it. But, to make 50% you must 
add 100% and actually sell the article; hence, it 
is in the selling that you make. No matter what 
you add to prime cost, you will not make a cent 
on the article unless you sell it. 

Therefore, since it is in the selling that you 
make the profit, it is on the selling price that you 
figure the profit you desire to make, gross, nom- 
inal net or net, as the case may be. Hence, if you 
desire to make 50% gross profit, you add to prime 
cost not 50%, but 100%, as previously explained. 

You are Being Misled — The arithmetic will tell 
you that the buying or cost price, whatever it be, 
is always 100%. 



88 



Profit Defined; Methods of Figuring Explained IX 

For example, if you buy hats at $3 each, the 
arithmetic tells you that you are buying them at 
100% and that, if you wish to make 25%, you are 
to sell them at 125%; in other words, that you 
are to add 25% to the cost price and you will have 
the selling price. 

By this method you are selling the hats at $3.75 
(25% added to cost) and you are led to believe 
that you are making 25% gross profit; that is, 
naturally, you will take 25% (instead of 20%) of 
$3.75 and say that your gross profit is $0.93 and 
that looks good, you think you are making money; 
but, when you look back, you will see that you 
added only $0.75 to prime cost. There must, 
therefore, be something wrong; you are not mak- 
ing so much money as you were led to believe. 
The arithmetic has been misleading you. You 
see that, instead of making 25%, as you were led 
to believe, you are making only 20%, 20% of 
$3.75 being $0.75, the amount added to cost. 

25% added to prime cost, therefore, cioes not 
mean 25% gross profit; instead, it means 20% 
gross profit. 

The Teaching is Wrong — ^Arithmetics are teach- 
ing this to boys and girls every day and giving 
them a wrong idea of business — misleading them. 
The students are being taught that which they 



89 



IX How to Figure Profit 

must unlearn if they would succeed in business. 

For example, almost every arithmetic you pick 
up contains examples of this kind: If A buys 
coal at $4 a ton, at what price must he sell it to 
make 25%? Answer, $5. 

He will make $1, but not 25%: he will make 
exactly 20% and this is gross. The difference 
between $5 and $4 is $1 and this divided by the 
selling price will give the per cent of gross profit, 
namely 20%. 

Again, if A buys eggs at 18c a dozen, at what 
price must he sell them to make 331/3% ? 

The arithmetic tells him to add % (33^/3% or 
$0.06) and sell them at $0.24, but $0.06 is only ^4 
(25%) of $0.24 and therefore he makes only 
25% gross profit 

Put it down as a settled fact that, in a mer- 
cantile or manufacturing business, profit is made 
in selling, not in buying, except as good buying 
means increased profit, a standard selling price 
being understood, and that it is on the selling 
price profit must be figured. 

Of course, technically, when we speak of mak- 
ing a certain per cent or amount, it means net; 
but, practically, it means sale over cost, the ex- 
pense of doing business not being considered as 
part of or in connection with the cost, but deduct- 
ible from gross profit 



90 



X 

Why a Net Proiat 



It seems to have been wisely ordained that 
every person should work — either for himself or 
for someone else; that is, in a business owned or 
controlled by himself or in one owned or con- 
trolled by someone else. 

One is said to work for himself when his capi- 
tal is the controlling factor in the business which 
he supervises or manages — when he has a pro- 
prietary-managerial interest. 

He is said to work for someone else when some- 
one else's capital is the controlling factor in the 
supervision and management of the business. 

But, regardless of whose capital is invested, the 
same responsibility and risk are present and the 
same necessity for a net profit exists. 

There are advantages and disadvantages in 
working for oneself, as there are in working for 
someone else. If one works for himself, he must 
have capital in addition to the preparation and 
ability necessary to work for someone else. 

He may have certain privileges in working for 
himself he would not have in working for some- 



91 



X How to Figure Profit 

one else; but, on the other hand, his responsi- 
bihties are greater and the chances of losing the 
money which he invests in a business venture are 
many, even under the most favorable circum- 
stances and conditions. 

Most persons in business, for example, insure 
for only part of the asset value of their property. 
They do not think it is necessary or profitable to 
insure for the full value, and it is possible there- 
fore to lose the difference between the inventory 
value and the insured value. 

It is possible, also, for a person to lose thru 
theft, business depression, depreciation, obsoles- 
cence and the like; while, if the business is not 
properly and wisely managed (this of course is 
not an excuse for extra profit), the chances of 
losing are always against the person investing. 

Therefore, as a fair and reasonable compensa- 
tion for the responsibility assumed and for the 
risk taken, every person engaging in business is 
entitled to a reasonable net profit on every dollar's 
worth of goods he sells, and he is not a good busi- 
ness man if he does not make it. 

But it does not require unusual business ability 
to make a net profit. It simply requires correct 
figuring. 

There are thousands of men in business selling 



92 



Why a Net Profit X 

goods for what it costs them to do business or 
less, and their going out of business is only a 
question of time. The numerous changes in pro- 
prietorship and management everywhere about us 
are, in large part, evidence of this. 

The life of a business which does not provide 
for a net profit must be and is limited. 

If a person cannot make at least as much or 
more money working for himself than he could 
make working for others in the same or in a 
similar line, including interest on his investment, 
he would better go out of business, free himself 
of the responsibility and risk incident to engaging 
in business upon his own account, and work for 
someone else. 

Again a profit sufficient simply to cover the ex- 
pense of doing business means that one must stand 
still, that he cannot grow, that he cannot expand. 

A person may start in business in a rented store 
or in a factory, but he may later wish to buy or 
to build. Or, if he starts in his own store or fac- 
tory, he may find it necessary to enlarge. Which- 
ever way he starts, he will certainly wish to in- 
crease his stock and his sales accordingly. But 
he cannot do these things without money. Will 
he have the money necessary to accomplish the 
ends he desires unless he makes a reasonable net 



93 



X How to Figure Profit 

profit? Not unless he uses his surplus capital, if 
he has any, and that spells failure. He cannot 
borrow money unless he is making a reasonable 
net profit. 

Growth an3 expansion are the direct results of 
net profit and they are possible only thru the 
making of a reasonable net profit. A person can 
usually borrow capital if he is making a reason- 
able net profit, but rarely can he do so if he is 
not — that is, in the regular course. 

A reasonable profit is the business man's right; 
correct figuring will produce it, and the buying 
public will pay it. What the public objects to is 
an unreasonable, excessive, uncalled-for profit. 

Any person can become rich on a small net 
profit (even as low as 5%) if he pushes his busi- 
ness, the amount of his profit being limited only 
by the volume of his sales. 



94 



XI 
What is a Reasonable Net Profit? 



This question must be considered from the view- 
point : 

1. Of the business 

2. Of the business man 

3. Of the pubHc 
That is: 

1. What net profit is the business, as a going 
concern, in competition with other businesses of 
a Hke nature, capable of producing under normal 
conditions and proper management? 

2. What net profit is the business man justly 
and equitably entitled to? 

3. What net profit will the public pay without 
feeling that undue advantage is being taken of 
them? 

It Depends in a Measure Upon the Business 

From the viewpoint of the business, the per cent 
of profit — gross, nominal net or net — one should 
make, assuming that it is understood by this time 



95 



XI How to Figure Profit 

what these terms mean, depends, in a measure, 
upon the kind of business in which he is engaged, 
as manufacturing, wholesale, retail, jobbing or non- 
trading, and upon the line manufactured, whole- 
saled, retailed or jobbed ; upon the volume in which 
sales are made in these respective lines, and upon 
the nature of the non-trading business. 

The volume of profit will vary in different busi- 
nesses in the manufacturing, wholesale, retail and 
jobbing lines, as well as the per cent. 

Conditions Which Limit Output 

The output of some businesses is limited: 

1. Because of limited demand for the goods 

handled. 

2. Because of limited capital. 

3. Because of a self-satisfied or poor man- 

agement. 

Any one of these conditions tends to limit the 
volume of profit, since volume depends upon out- 
put or sale, regardless of the per cent made or 
attempted to be made. 

The output of other businesses, operated under 
different conditions, is limited only by physical 
impossibility to meet the demand, and by this im- 
possibility only is the volume of profit limited, 
assuming that the per cent is normal. 



96 



What is a Reasonable Net Profit f XI 

The Gross and Net Profit Made 

The per cent of gross profit made in differ- 
ent businesses of the same kind or class, whether 
manufacturing, wholesale, retail or jobbing, varies, 
ordinarily, from 25% to 50%, with the general 
average of these businesses ranging, ordinarily, 
from 30% to 35%, which should represent a net 
profit of at least 5% to 10%. 

The gross profit in small businesses carrying a 
staple line of goods of a certain class, for ex- 
ample, will be about 25% to 33^/3%, while that 
in a business carrying a line bordering on novel- 
ties will range from perhaps 30% to 40%, the 
former representing a net profit of perhaps 5% 
and the latter 5% to 10% — assuming in both cases 
that the business is rightly managed and that profit 
is correctly figured, and assuming further that the 
capital is in proportion to sales and that the in- 
vestment is turned rapidly and that the expenses 
are limited to the needs of the business. Not all 
businesses are run in this way and not all produce 
the profit mentioned. 

In some businesses the gross profit may not 
fall below 40% to 50%, but such businesses are 
few and far between compared to the many whose 
gross profit will range from 25% to 33y^%. 



97 



XI How to Figure Profit 

Novelty and Season Goods 

On novelty lines, whether clothing, 3ry goods, 
furniture, shoe or something else, a slightly larger 
per cent of gross profit is made than is possible 
ordinarily on staple lines. And there is a reason 
for this. In most cases the investment is larger, 
the sales are not so frequent and the risk is 
greater; and then, too, if the article is what the 
person wants he will pay the price. 

Goods in season also will sell at a higher per 
cent of gross profit than will the same goods out 
of season or goods not affected by the season. 

In any business, certain articles which are car- 
ried in stock yield a higher per cent of gross profit 
than certain other articles. Some articles are sold 
at a loss and others must necessarily make up this 
loss. This class of sales — those yielding insuffi- 
cient profit — merchants should watch closely. 

The Consumer is Interested in the Volume 

Again, in certain businesses, and in the sale of 
certain articles in almost any business, the vol- 
ume of gross profit may seem to the inexperienced 
large, while the per cent may be normal — reason- 
able and just. 



98 



What is a Reasonable Net Profit? XI 

Comparing the gross profit made, in certain in- 
dividual sales, in one business with that made in 
another, it is interesting to note the impression 
upon the inexperienced mind which volume will 
make. 

For example, in a certain business a certain 
article costing the merchant $60 will sell for, say, 
$90, which is low in the particular case in mind, 
the volume of gross profit being $30. In a certain 
other business a certain article costing the mer- 
chant $0.10 will sell for $0.15, the volume of 
gross profit being $0.05. In the one sale, the 
gross profit is $30; in the other, $0.05, yet the 
per cent of gross profit is the same in the two 
sales, namely, 331/3%. 

The Merchant Should be Interested in the Per Cent 

If the average consumer knew that a single 
article purchased at retail yielded the merchant a 
gross profit of $30, he would say that advantage 
was being taken of him; but he would think noth- 
ing of allowing the merchant five cents profit on 
a fifteen cent article. It is the volume which con- 
cerns the consumer, but it is the per cent which 
should concern the merchant. And yet the aver- 
age merchant today measures his profit by dollars 



99 



XI How to Figure Profit 

and cents, rather than by per cent, and thinks he 
is making money, whereas per cent measurement 
would enable him to know. If he watches the 
per cent and does not allow it to go below normal, 
the volume will take care of itself if he pushes 
his sales. 

The Per Cent Depends Upon the Expense to Sale 

Granting that every business — manufacturing, 
trading and non-trading — should produce a fairly 
uniform per cent of net profit, the per cent and 
volume of gross profit will, as previously stated, 
vary widely. 

In considering the gross profit which different 
businesses should produce, a distinction must be 
made between businesses which manufacture or 
carry in stock the goods which they sell and those 
which simply act between the producer or manu- 
facturer and the wholesaler or retailer, who, in 
turn, sells to smaller buyers. Persons so engaged 
are properly styled jobbers, though commonly 
known as wholesalers. They do not handle the 
goods; they do not even see them; but they do, 
as in a wholesale business, acquire and pass the 
title. They buy and sell in large quantities — car- 
load lots, and, generally, by wire, the mail even 



100 



What is a Reasonable Net Profit f XI 

being too slow. The sales volume is large, in pro- 
portion to which the expenses are low, and hence 
the gross profit will usually be as low as 5%, 3% 
and in some cases 1% or less. 

The per cent of gross profit which a person 
should make, therefore, will depend entirely upon 
the nature of the business in which he is engaged, 
as manufacturing, wholesale, retail, jobbing, etc., 
and the kind of goods handled. It is sufficient to 
say that, if the business is to be successful and 
the investment profitable, the per cent of gross 
profit must be large enough to cover all expenses 
(Indirect and Direct), interest on the investment 
and a reasonable net profit besides. 

Five to Ten Per Cent Net 

And now we return to the question. What is a 
reasonable Net Profit? This cannot be answered 
in a word. It may be said that a person is en- 
titled to all he can make; but to this should 
be added — "in fairness to all concerned". It is 
undoubtedly true that some take advantage of 
opportunity; but opportunity comes and goes, 
while reasonableness, fairness and justice are or 
should be with us always. Opportunity as re- 
ferred to here, of course, has reference to the 



101 



XI How to Figure Profit 

regular course of trade, to the sale of staples — 
the necessaries of life. 

In its economic sense Opportunity is the busi- 
ness man's big study. He should not only know 
what it means, but when and how to take advan- 
tage of it. Opportunity in this sense is a benefit 
not only to the one taking advantage of it, but, 
thru his foresightedness, to all who may in any 
way be affected by his operations. 

Henry Ford, for example, has made millions in 
a brief time thru placing on the market the right 
thing at the right time and at a price which has 
added to the pleasure and prosperity of millions 
of persons in all walks of life. 

If all men would use their minds, as Mr. Ford 
has used and is using his mind, the world would 
be the better for it. 

Since the average business is established for 
private gain, it is the convenience, service, secur- 
ity and fairness to the public that will increase 
the net profit — the gain. Selfish motives may win 
for a time, but they are bound to react. 

From the viewpoint of the business, the busi- 
ness man and the public, 5% to 10% net profit is 
fair, reasonable and just. Any business properly 
managed and operating under reasonably favor- 
able conditions will produce this profit; any busi- 



102 



What is a Reasonable Net Profit f XI 

ness man who pushes his sales will get rich from 
this profit, and the public will pay it without a 
whimper. 

Most Business Men Do Not Make Enough 

But every business man does not make 5% to 
10% net profit on his average daily sales — due of 
course, in large part, to incorrect figuring. In 
normal times, more make under 5% than over, 
while, as stated in another chapter, many simply 
break even or run behind and sooner or later go 
out of business — sell out to the other fellow who, 
in turn, tries his luck; and, with him, and others 
who figure incorrectly, it is luck. 

It is true that a few businesses make more than 
5% net profit, some as high as 10% to 15% and 
even more; but, in normal times, they are few 
and far between — that is on sales. Cash discount 
and other earnings will increase the per cent of 
course. 

Dividend and Profit Not the Same 

Because certain businesses pay their stockhold- 
ers an annual dividend of 50% to 100% it must 
not be inferred that a net profit of 50% to 100% 



103 



XI How to Figure Profit 

is being made. These are two different proposi- 
tions. Dividends are figured on capital invested, 
while net profit is figured on sales. And the 
smaller the investment in proportion to sales, the 
larger the per cent of dividend, which is declared 
on a basis of the dollar invested. 

Reasonable Profit and Large Sales 

A large dividend is not the result of a large net 
profit on small sales so much as a reasonable net 
profit on large sales. That is, it is possible to put 
the selling price so high as to reduce the sales 
even to the point of losing money; or it may be 
so placed as to increase the sales to a point that 
will show a reasonable net profit. 

Regardless of the kind or nature of the busi- 
ness, it should be the aim of every business man 
to make 5% and more if it will not react upon 
the sales. Certain manufacturing and a few mer- 
cantile lines, as above stated, will make 10% and 
possibly more without affecting the sales. But 
this may be due in part to close buying and watch- 
ing expenses. 

Reducing the per cent of net profit with a view 
to increasing the volume thru increased sales may 
be wise in some cases, but the merchant must 



104 



What is a Reasonable Net Profit? XI 

know what he is doing. He must be sure that 
he is increasing the sales without increasing the 
expenses in the same ratio. It is due the buying 
pubHc as well as the business man himself that 
expenses be kept in proportion to sales. 

Decide Upon the Profit and^ Push the Sales 

Settle upon the per cent of average net profit 
you propose to make, whether this be 5%, more 
or less — what the business is capable of produc- 
ing and what is fair to the buying public — and 
then push your sales to the limit and you will 
make money, the volume being limited only by 
the sales. But eliminate net profit entirely and 
you may push your sales into the millions and you 
will be no better off financially at the end of the 
year than you were at the beginning, if as well. 



105 



XII 



Profit Too High or Too Low Means a 
Losing Business 



There is just one way of figuring profit and 
that is the right way. If you figure too high you 
will lose trade; your customers will go elsewhere 
or go without and you will lose the trade cor- 
rect figuring would bring you. Not only will you 
decrease the volume of net profit, but you may 
eliminate it entirely — even run behind. 

If you figure too low, you will lose money on 
every dollar's worth of goods you sell. 

The remedy is to buy at the closest figure you 
can, direct or thru the middleman, depending upon 
the volume of your sales, to list and figure your 
expenses and interest on investment accurately 
and ascertain the relation in per cent which they 
bear to sale and add to this per cent the per cent 
of net profit to which you are entitled and then 
add the equivalent per cent to cost (if the selling 
qualities of the article permit) and you will make 
good if you push your sales. 

But be sure to list your expenses correctly. 
Take into consideration the business in which 



106 



Profit Too High or Too Low Means Loss XII 

you are engaged and do not omit or underestimate 
a single item of expense, however small, incident 
to the business. 

Above all, do not estimate or take for granted. 
Get down to brass tacks, so to speak. Do not 
overlook your own salary (what you could get 
working for someone else in the same line), the 
interest on your total investment (the going rate), 
depreciation, etc.. * 

Interest on investment must be taken into con- 
sideration not only in charting your expenses with 
a view to fixing the selling price, but also in the 
statement with a view to comparing the value of 
the investment with that which pays a fixed rate 
of interest, and which we commonly call secured 
loan; but it must not be made a ledger or operat- 
ing charge in the running of your business. The 
government will not allow it in annual reports and 
it should not be considered in the regular course 
of account-keeping. 

Additional information touching upon this sub- 
ject will be found in Chapters XXIII, XXIV and 
XXVI, as well as in preceding chapters. 



107 



XIII 

Prime or Manufacturing Cost, Gross Profit, 

Loss and Selling and Sale Prices 

Illustrated and Explained 



General 

As previously stated, cost may be viewed from 
one of four points, namely. Prime or Manufactur- 
ing (as the case may be). Delivered, Subtotal or 
Total, depending upon the purpose for which the 
cost is desired. Prime or Manufacuring Cost is 
taken as the basis for establishing the Selling 
Price in Figure 3, Scale 1, following. 

Gross Profit, as has already been explained, 
means the margin between Prime Cost in a mer- 
cantile business or Manufacturing Cost in a manu- 
facturing business and the Selling or Marked-Up 
Price (100%) and includes or should include the 
Carrying or Manufacturing (as the case may be). 
Commercial and Direct expenses. Interest on In- 
vestment and a reasonable Net Profit — Figure 3 
following. 

Gross Profit May be Sufficient or Insufficient — Gross 
Profit therefore may cover simply the expense of 
doing business, or even less, or it may be sufficient 



108 



Prime or Manufacturing Cost, Profit, Etc, XIII 

to cover the expense of doing business and inter- 
est on investment and a net profit as well, depend- 
ing upon the Selling or Marked-Up Price. That 
is, thru placing the Selling Price too low, the Gross 
Profit may be reduced to a point that will merely 
cover the expense of doing business or less, or it 
may be increased to a point that will include a net 
profit over all. Study Figure 3. 

The difference between Prime or Manufactur- 
ing Cost (Scale 1) and Selling Price (100%), 
whether it be large or small, represents Gross 
Profit, whether sufficient or insufficient. The per 
cent of Gross Profit may vary from ^'0" to 100, 
depending upon how high the Selling Price is 
placed (Scale 2 A to I). 

Viewed from the Selling Price of 100%, the 
Cost (Prime or Manufacturing) will be low or 
high on the per cent scale (Scale 1) from ''0'' 
up, depending upon the per cent of Gross Profit 
(Scale 2) or Loss (Scale 3). As the Gross Profit 
(Scale 2 A to I) increases or goes up the scale, 
the Cost (Scale 1) decreases or goes down the 
scale in the same ratio. But as the Gross Profit 
decreases or goes down the scale, the Cost in- 
creases or goes up the scale in like ratio. 

For example, if the Gross Profit on sale is 25% 
(Scale 2 F), the cost will be 75% (Scale 1 F). 



109 



XIII How to Figure Profit 

If the Gross Profit is 50% (Scale 2 G), the cost 
will go down to 50% (Scale 1 G), and so on, 
the Cost decreasing in the same ratio that the 
Gross Profit is increasing. If the Selling Price 
is placed so high as to bring the Gross Profit up 
to 75% (Scale 2 H), the Cost will go down to 
25% (Scale 1 H). If the article sold was given 
to the seller, the Gross Profit would go up to 
100% and the Cost down to "0'\ 

On the other hand, if the Gross Profit is elimi- 
nated (Scale 2 A), by marking the article down, 
the Cost will go up to 100% (Scale 1 A), the 
increase in Cost being in the same ratio as the 
decrease in Gross Profit. 

From the standpoint of any cost basis, 100% 
gross profit is not possible. If the article sold 
was given to the seller, then of course the sale 
would represent a gross profit of 100%. 

Neither is 100% loss possible since, if you give 
the article away, you treat it as a sale and charge 
the amount to an appropriate expense account. 

The Diagram Explained 

In the accompanying diagram (Figure 3), Scale 
1 represents Prime or Manufacturing Cost to Sale 
Price, and this is true whether the Sale Price be 



110 



Prime or Manufacturing Cost, Profit, Etc. XIII 



SCALe t 




SCALE a 



SCALE 3 



-asc 



-50 



-25 



r L 

SCALE 4 



Figure 3 

This Diagram Illustrates the Principle of Figur- 
ing Profit and Loss on the Selling Price. 



Prime or Manufacturing Cost, Profit, Etc. XIII 

the same as the SelHng Price or below — discounted 
or marked down. The per cent to sale which this 
cost represents will depend upon the per cent of 
gross profit made in selling the article, or upon 
the per cent below cost at which it is sold, as 
shown by the per cent scale (Scale 2 A to I or J 
to L, as the case may be). 

Bear in mind that, as the per cent of gross profit 
(Scale 2) decreases, the per cent of cost (Scale 1) 
to sale increases on the per cent scale. If the 
gross profit is entirely eliminated (Scale 2 A), the 
article being sold at cost, the per cent of cost to 
sale will go up to 100% (Scale 1 A), the cost price 
and sale price being the same; but the Sale Price 
to Selling Price will be 75% (Scale 4 A), the loss 
(Sale Price below Selling Price) being 25%. 

Therefore, at whatever price the article is sold, 
whether at cost, above or below, the Selling Price 
(the price at which you should sell) will always 
be 100% ; but do not confuse this with the Sale 
Price (the price at which you actually sell), which 
may or may not be the same; that is, the Sale 
Price may or may not represent a discount or 
mark-down from the Selling Price. 

Selling Above Cost 

Apply the diagram (Figure 3) to the following: 



111 



XIII How to Figure Profit 



An article represented as costing $3 sells for $4- 



a gross profit of $1 or 25%. This means that 
331/3% was added to cost ($3) to produce the 
selling price ($4) or a gross profit of 25%. The 
gross profit ($1) divided by the selling price ($4) 
equals 25%. Hence the gross profit of $1 equals 
25%. 

If the same article costing $3 is sold for $6, 
there will be a gross profit of $3 or 50%, which 
means that 100% was added to cost. 

Thus it will be seen that, when the selling price 
was $4, the gross profit was 25% and the cost 
75% of the selling price, whereas, fixing the sell- 
ing price at $6 produces a gross profit of 50% 
(Scale 2 G) and runs the cost down the scale to 
50% (Scale 1 G). 

It will be noted therefore that the higher the 
gross profit in per cent, the lower the cost in per 
cent in the scale between the lines A and I, Scale 1. 

Looking at this in the opposite light: If the 
article costing $3 should be sold for $3.50, the 
gross profit would be only $0.50 or 14 2/7%. This 
would bring the cost up to 85 5/7% (Scale 1 — 
between lines D and F). 

If the same article costing $3 is sold for $3, it 
eliminates the gross profit and brings the cost up 
to 10070 (Scale 1 A). 



112 



Prime or Manufacturing Cost, Profit, Etc. XIII 

Here it will be noted that, insofar as the cost 
of the article is concerned, the seller is coming out 
even; he is selling it at the price he paid for it, 
but he is losing what it costs him to do business 
or, in other words, the gross profit necessary to 
cover the operating and other expenses; hence he 
is selling at a direct money loss. 

Selling Below Cost 

Again, if the regular selling price of the article 
costing $3 is fixed at $4, as above, but it is sold 
for $2, the sale below cost will be $1, and the dis- 
count will be 50% (Scale 3 J), looking at the 
matter in the light of ledger debit and credit, or 
of figuring profit and loss on the selling price, as 
we should. In this case the Sale Price to Selling 
Price will be 50% (Scale 4 J). 

In other words, in selling the article at $2 
instead of at the marked-up price of $4, you 
allow a discount of $2 — $1 representing the gross 
profit of 25% (sale over cost) which you should 
have made and $1 {'^'^y^%) the discount from 
cost price. This discount is 50% — ^$2 (discount) 
divided by $4 (the established selling price). That 
is, in the light of cost keeping, sales would be 
credited for $4 anci debited (thru Loss and Gain) 



113 



XIII How to Figure Profit 

for $2. At least, profits would be reduced regard- 
less of the method — this or deducting from mer- 
chandise — marked down. 

If the article is sold for $1, the discount will be 
75% — $2 below cost plus the gross profit of $1 
(Scale 3 K). 

If the article is sold at a fraction of one dol- 
lar — fifty cents, twenty-five cents, ten cents — the 
discount will be almost, but not quite, 100%, that 
is, taking the selling price as the basis. In other 
words, 100% discount or loss in selling is not pos- 
sible. The discount or loss may approach 100% 
within a fraction, but it cannot reach it. 

Cost to Sale 

Between lines A anH I — Scale 1, the Cost to 
Sale will vary according to the per cent of gross 
profit made in selling. 

If the established selling price provides for a 
gross profit of, say, 25% (Scale 2 F) and the 
article is marked down to sell at cost (Scale 2 A), 
the elimination of the 25% gross profit runs the 
Cost to Sale up the scale from 75% to 100% — y^ 
or 33%%, the loss on selling price being 25% and 
the sale price to selling price being 75% — Follow 
line "A" from left to right across the four scales. 



114 



Prime or Manufacturing Cost, Profit, Etc, XIII 

Again, i£ the article is marked down to sell at 
331/3% below cost (Scale 2 J), the Cost to Sale 
will go up the scale to 150%, the loss on selling 
price being 50% and the sale price to selling 
price being 50% — Follow line "J" across the four 
scales. 

If the article is marked down to sell at 66%% 
below cost (Scale 2 K), the Cost to Sale will go 
up the scale to 300%, the loss on selling price 
being 75% and the sale price to selling price being 
25% — Follow line "K" across the four scales. 

And so on down to the lowest point at which 
the article can be sold and regarded as a sale. 
If you give the article away, you treat the gift as 
a sale (100%) and charge the amount to an ap- 
propriate expense account. 

One Hundred Per Cent Not Possible 

In the sale of property of any kind in the regu- 
lar course of business, it is not possible to make a 
gross profit of 100% unless the article was given 
to the seller, and this would hardly be in the 
"regular course"; neither is it possible to lose 
100% in selling below cost, the arithmetics to the 
contrary notwithstanding. To lose 100% one 
would have to give the article away and eliminate 
it from sale, which is not done. 



115 



XIII How to Figure Profit 

When a person makes the statement that he 
made 200% on a certain deal, he confesses that 
he does not know how to figure profit. It is true 
that one may add several hundred or even several 
thousand per cent to the cost of an article to pro- 
duce a certain per cent of gross profit on sale, but 
no amount added to cost will produce 100% gross 
profit; since, if there is the slightest fraction of 
1% cost, the gross profit cannot exceed the differ- 
ence between this and 100% — the selling price. 

Correspondingly, one cannot lose 100% in sell- 
ing below cost, however closely he may approach it. 

It is in the selling we make or lose. Hence, it 
is on the selling price we figure profit and loss. 

Selling at a Discount 

At whatever price the article is sold below the 
established Selling Price it is sold at a discount, 
which means at a reduction of profit. Selling at 
a reduction of profit does not mean necessarily 
below Cost, but below Selling Price, and the lower 
the article is sold below the established selling 
price, the greater the reduction of profit. 

Selling at a Loss 

When we fail to make a gross profit, as in sell- 
ing at cost, we lose the expense incurred in doing 
business. 



116 



Prime or Manufacturing Cost, Profit, Etc. XIII 

When we sell below cost we lose on the pur- 
chase price as well, the sum of the two represent- 
ing our loss, net profit as shown by the selling 
price not considered. 

It is important to know whether an article is 
being sold above, at or below cost in order to know 
the per cent of gross profit or loss. An article 
may be sold at a gross profit and yet at a loss, as 
above stated, as where the sale price is below the 
established selling price (Study Figure 3). 

Selling on an Even Basis, at a Profit or at a Loss 

You sell on an even basis when you sell at the 
total cost of doing business plus the interest on 
your investment. 

You sell at a net profit when you sell above the 
total cost of doing business plus the interest on 
your investment. 

You sell at a loss when you sell below the total 
cost of doing business plus the interest on your 
investment. 

In selling at a discount, you may be selling at 
a net profit, at a loss or on an even basis. 

You may sell certain articles at a net profit and 
still do business at a loss; or you may sell certain 
articles at a loss and still do business at a net 
profit. 



lir 



XIV 

Deviating From the Established Selling 

Price 



Selling Price Defined 

The established Selling Price is the price fixed 
by the seller upon the article which he sells at the 
time of putting it into stock. This is also known 
as the Marked-Up price. 

We use the word selling in this sense, as dis- 
tinguished from the word sale, in connection with 
the price at which the article is actually sold, which 
may or may not be the Selling Price. The Selling 
Price, therefore, is the price at which the article 
should be sold as the result of correct figuring, or, 
in other words, the Marked-Up Price. The Sale 
Price, on the other hand, is the price at which 
the article is actually sold. This may be the same 
as the Selling or Marked-Up Price or it may be 
lower or higher, depending upon conditions; that 
is, it may be marked down to sell at a lower price 
or it may be marked up to sell at a higher price, 
depending upon the selling qualities of the article 
and the market price. 



118 



Deviating From Established Selling Price XIV 

The Selling Price may or may not be the result 
of correct figuring. Too often it is the result of 
incorrect figuring or of no figuring at all — fixed 
arbitrarily or by guess or by custom or by compe- 
tition. Of course, a certain article or all articles 
may be marked up arbitrarily (according to their 
selling qualities) if it is known at the time that 
the marked-up price represents a sufficient gross 
profit, or that the total sales will represent a suffi- 
cient average gross profit. But you can be sure 
of this only by keeping a correct book record 
of sales and verifying your figures weekly and 
monthly. 

The Reasons and the Results 

Expenses Estimated 

Few persons engaged in merchandising or man- 
ufacturing figure their expenses correctly. A large 
per cent of them, in fact, have no means of arriv- 
ing at correct figures, because of the crude way in 
which they keep their books. An outsider would 
be surprised at the number of merchants, espe- 
cially, who, arbitrarily, add 5% to 10% to the 
purchase price to cover the carrying expenses in- 
stead of the actual outlay for this service. They 
want to be on the safe side; but too often, un- 



119 



XIV How to Figure Profit 

fortunately, this puts them on the losing side. 
They defeat their own ends. 

And in a similar (arbitrary) way they figure 
that a certain per cent should cover their selling 
expenses. Few include their own salary and still 
fewer interest on investment or many other items 
of expense or charge, including breakage, waste, 
spoilage, etc. 

The Basis is Wrong 

They do not therefore have a correct basis for 
establishing the selling price. The price they fix 
may be on the mark, above or below — as they 
happen to strike it. If above, they may lose trade ; 
if below, they may lose money on every sale they 
make, or, at best, come out even on the average 
and get out of their business a mere living, 
whereas correct figuring would enable them to 
make a reasonable profit. 

Of course, if the business man is skilled in the 
technical side of his business, he will know at the 
time of buying the goods about the price at which 
they will sell and he will mark-up accordingly. 
But he must know the gross profit which this 
marked-up price represents nevertheless. 

The Price is Fixed for Them 
As a matter of fact, the selling price is often 



130 



Deviating From Established Selling Price XIV 

fixed by the manufacturer or wholesaler of whom 
the merchant buys or by state law. That is, the 
price made to the merchant is usually such as to 
admit of a gross profit of 10% to 40% or more, 
depending upon the price at which the article is 
usually sold. This is especially true of controlled 
or advertised goods, and of school books in states 
where the sale price is regulated by law. 

Method of Figuring Wrong 

But, granting that a certain per cent of gross 
profit may be reasonable, the merchant makes a 
mistake when he adds this per cent to cost instead 
of the equivalent. He forgets that profit should 
be figured on sale, not on cost, and, as a result, he 
merely comes out even or perhaps runs behind. 

And he makes another mistake when he fails to 
mark down when he finds that certain goods will 
not sell readily at the marked-up price. He also 
makes a mistake in not marking up when the 
prices at which the goods can be duplicated go up. 

Sliding Scale Price 

It IS surprising how many merchants in certain 
lines even today fix what may be called a sliding 
scale price. They fix the price high enough to 
enable them to come down and thus lead the 
customer to think that he is getting a special 



121 



XIV How to Figure Profit 

bargain — and at that he may be paying more or 
less than some one else. The practice is bad — 
unsafe, unbusinesslike. 

If the price fixed by the merchant is the result 
of correct figuring, based upon the selling qualities 
of the article, he will not need to come down. 
Ninety-nine out of every hundred people feel 
better satisfied if they know they are paying the 
price others pay; and, if the price is right, they 
will seldom go elsewhere. Of course, some buy- 
ers make a practice of "looking around", so to 
speak; but, if the prices are established on a cor- 
rect basis, the sales will increase rather than de- 
crease. 

Special Discounts for Special Reasons 

In some businesses all of the time and in all 

businesses some of the time deviation from the 

selling price is necessary in certain specific cases 

and for certain specific reasons; as, for example: 

1. Where a merchant sees fit to allow ministers 
or teachers a special discount of 5% to 10%, 
which may or may not be good business; or 

2. Where most merchants allow a special dis- 
count of 5% to 20% to employees; or 

3. Where a reduction (mark-down) in the price 
of certain articles is made to correct mistakes in 



122 



Deviating From Established Selling Price XIV 

buying or to move a surplus or an out-of-season 
stock or to meet falling prices; or 

4. Where certain specific articles are marked 
down to attract trade — for advertising purposes, 
which, if rightly handled, may be good business; 
yet, in most lines of trade, there is usually a suffi- 
cient unsalable or surplus stock which can be used 
for this purpose. 



The Merchant Knows What He is Doing 

In all of the above cases the merchant knows 
or should know what he is doing and what he is 
doing it for. If the selling and the sale prices are 
the result of correct figuring, he will know not 
only the reason, but the effect. He will know 
whether he is sacrificing simply his net profit or 
nominal net profit or part or all of the gross profit 
necessary to cover the expense of doing business. 
In other words, he will know the per cent of dis- 
count or mark-down and the effect it will have on 
his business — how much it will reduce or increase 
his sales and net profit for the year. 

The discounts and mark-downs referred to above 
should be kept track of in a book kept for this 
purpose and deducted from the marked-up mer- 



123 



XIV How to Figure Profit 

chandise price, having been previously taken into 
consideration in figuring the expense to sale or in 
establishing the selling price. Such discounts and 
mark-downs increase the per cent of expense to 
sale (reduce gross profit) and must be taken into 
consideration in ascertaining the per cent of gross 
profit necessary to make on sale in establishing 
the selling price. 

In other words, where an established selling 
price is fixed as a result of correct figuring, any 
discount or mark-down from this price either in- 
creases the expense volume or reduces the sales 
volume and, in either case, increases the expense 
per cent to sale — decreases the profit. 

One Price Wins 

While discounts may be necessary sometimes, 
yet, in most cases where allowed by retail mer- 
chants in rural towns especially, they are not; and, 
directly or indirectly, they are detrimental to the 
interests of the business, particularly when indis- 
criminately allowed. 

The government shows no favors in the pay- 
ment of taxes; neither do steam or electric rail- 
v^ays in the payment of fares, and yet business 
goes on and people travel just the same. 



124 



Deviating From Established Selling Price XIV 

Merchants can hold to the same fast rule if they 
figure correctly, and their sales will increase rather 
than decrease. They will gain two customers to 
every one they lose. 

The ^'big" merchants in large cities hold to this 
rule (They would not be big if they did not), and 
why should not small merchants do the same? It 
is simply a matter of correct figuring and correct 
account-keeping — doing business on a business 
basis. 

Under "Special Discounts for Special Reasons" 
preceding, number 2 is a legitimate discount ; num- 
ber 3 also at times, but good judgment in buying 
and close attention to turning stock will reduce 
this to the minimum. 



125 



XV 
Some Eye-Openers 



25% Added to Cost Does Not Mean 25% Gross Profit 

If you think for a minute that 25% added to 
cost means 25% gross profit, test your theory on 
the following: 

A has a city lot to sell. He offers it to you 
for $400. A friend of yours tells you that he can 
get you a buyer at $500 (25% added to cost) if 
you will pay him 20%. That looks good to you; 
it will net you S%(?) and so you buy the lot 
Your friend sells the lot for $500, deducts his 
commission of 20% and turns over to you — how 
much? Exactly $400. Where is your 5%? It 
doesn't work when put to a practical test, does it? 
And yet this is the test we are up against in busi- 
ness every day. 

Your friend is not charging you for buying the 
lot, but for selling the lot. His commission is 
based on the selling price and it is on this basis 
you must pay him in equity and in law. 

In the above example, you buy the lot for $400, 
add 25% ($100) to the purchase price and, on the 



12G 



Some Eye-Openers XV 

assumption that you will make 25% gross profit, 
as looks reasonable in theory, you offer your friend 
20% for selling the lot, feeling satisfied with 5% 
as your share ; but you discover your mistake after 
it is too late, after you have lost out, as hundreds 
and even thousands do and must if they persist in 
figuring profit on cost. 

You add to cost a certain per cent with a view 
to increasing it to a selling price that will produce 
the per cent of gross profit you desire to make; 
but do not forget that the per cent you add must 
be a larger per cent than the per cent of gross 
profit you wish to make; in other words, that a 
certain per cent added to a smaller number (cost) 
is not the same per cent of a larger number (sale). 



The Same Amount Added to Different Costs 
Will Not Produce the Same Profit 

So, also, if you think that adding an amount 
definite to different costs will produce the same 
per cent of profit, as so many do, test your theory 
on the following: 

A grocer buys eggs at 16 cents a dozen and 
sells them at 20 cents. He adds 4 cents to cost 
and makes a gross profit of 20%. 

At a later period he buys eggs at 18 cents and 



127 



XV How to Figure Profit 

sells them at 22 cents. He adds 4 cents to cost, as 
before, but makes a gross profit of only 18 2/11%. 

At still a later period he buys eggs at 28 cents 
and sells them at 2>2 cents. He adds 4 cents to 
cost, as before, but makes a gross profit of only 
121/2%. 

And yet merchants are doing this very thing 
(lay in and day out. 4 cents on a dozen eggs is 
4 cents, regardless of the cost price, but that 
sort of figuring would soon drive a person out 
of business. 

In the first example, the gross profit is fair, it 
will probably cover the expense of doing business. 

But, in the third example, the merchant is cer- 
tainly losing money. On the same basis of doing 
business, what will be his gross profit when eggs 
are selling at 50 cents a dozen, present-day prices? 
Assuming that he buys them at 45 cents, thus 
gaining 5 cents, his profit is only 10% — less than 
it costs him to do business. 

Eggs selling at SO cents should be purchased 
at not to exceed 40 cents to come out about even; 
whereas, to make a net profit, the sale price must 
be higher or the purchase price lower — on the 
supposition of course that the expense to sale is 
20% — it may be more or less. 

And what is true of eggs is true of butter and 



128 



Some Eye-Openers XV 

everything else the selling price of which is fixed 
by adding to cost an amount definite rather than a 
per cent definite. Four cents or five cents or ten 
cents may look good and yet be far short of the 
required gross profit. 

In each of the three examples above, add 25%, 
instead of 4 cents, and the gross profit will be, 
uniformly, 20%, as in the first example. 

It may be necessary to sell eggs at an insuffi- 
cient gross profit, even at a loss, but the merchant 
should know what he is doing; he should sell with 
his eyes open, and what he loses in this way should 
be kept track of in an appropriate expense account 
or record and not overlooked in the analysis of the 
iday's or month's or year's business. It should be 
so kept as to stand out prominently on the sales 
sheet at the close of each day's and week's and 
month's and year's business. 

Profit is measured by per cent, not by dollars 
and cents. The idea of adding an amount definite 
rather than a per cent definite to cost with a view 
to fixing a selling price that will yield a satisfac- 
tory net profit is wrong — it is deceiving. 

It is not necessary, of course, in marking goods 
for sale, to figure the per cent of gross profit to 
a fraction. Life is too short. But it is necessary 
to see in your mind's eye that the price you pro- 



129 



XV How to Figure Profit 

pose to mark represents a satisfactory gross profit ; 
and weekly and monthly, if not daily, the average 
gross profit should be figured to a fraction and 
compared with the per cent of expense to sale. 



130 



XVI 



The Two-and-Three-for-a-Quarter Idea 



Wrong on the Face o£ It 

Not least among the many practices of retail 
merchants which reduce their profits is that of 
selling ten-cent articles in quantities of three for 
a quarter and fifteen-cent articles in quantities of 
two for a quarter or three for thirty-five cents. 
While some merchants have come to see the folly 
of this, the practice is still very general. 

The idea of the merchant is that it will increase 
the volume of his sales and that this increased 
volume will more than ofifset the reduction in 
price per unit or article in comparing expense to 
sale. But the idea is wrong on the face of it. The 
merchants who practice this have, as a rule, a 
regularly established and possibly slowly increas- 
ing trade and the articles sold in this way are 
usually staple and of such a nature that their con- 
sumption is uniform — so much a day or a week or 
a month, as the case may be. 



131 



XVI Hozv to Figure Profit 

It Does Not Increase Trade 

For example, in the grocery business, if a cer- 
tain article is consumed by a certain family at the 
rate of one a day or one a week or one a month, 
and three are purchased at one time, it means that 
the article will be called for only once in three 
days or three weeks or three months, as the case 
may be. As a rule, there will not be a greater 
consumption because of the quantity reduction in 
price; and, since the article is staple and sold at 
this quantity price as a matter of course and by 
all merchants in the town alike, no more custom- 
ers are attracted to the store and the visits of the 
regular customers are made less frequent, whereas 
the aim of the merchant should be to get his regu- 
lar customers to come as often as possible and to 
attract as many more as he can thru the added 
life of the store. 

How Trade May be Increased 

If the merchant wishes to increase his volume 
of sales, and his profits accordingly, he should 
offer something special (surplus or unsalable 
stock, and this straight) to attract others than 
his regular customers and change the specialty 
before the novelty wears off; and it goes without 



133 



The Two-and-Three-for-a-Quarter Idea XVI 

saying that such sales should have ample publicity 
of the right sort — nothing is better than news- 
paper advertising if skillfully used. 

It is a Money Loser 

The idea of selling two or three articles for a 
quarter has not one redeeming feature. On the 
contrary, it is a money loser from beginning to 
end. Not only does it sell no more goods to a 
regularly established trade, but it results in a 
money loss on every sale made. 

If the total expenses and charges incident to 
the business are, say, 20%, and they are in pro- 
portion to sales, and the net profit desired is, say, 
5%, an article costing 7% cents and selling for 
10 cents will yield a gross profit of the sum of 
207o and 5% or 25%. 

This is good business and why spoil it by selling 
three for a quarter at a gross profit of only 10%, 
half what it costs you to do business — if, as above 
stated, your expenses are in proportion to sales? 

It V7ill Not Work in Practice 

The merchant holds that trebling the volume of 
each sale reduces his expenses and yields him a 



133 



XVI How to Figure Profit 

larger volume of net profit in the aggregate. This 
looks well in theory, but it will not work out in 
practice. If the larger volume of sales reduces 
his expenses it is because his expenses are too 
high for the smaller volume; and, instead of in- 
creasing his sales at a sacrifice of profit, he should 
reduce his expenses to a point in proportion to his 
sales and hold to a normal gross profit and sell 
straight; then he may boost his sales, increasing 
his expenses in the same ratio, and he will make 
money. 

But are his sales larger because of selling three 
for a quarter? If any difference, they will be 
smaller. Keep track of your sales and see how 
many more customers you will draw because of 
this practice. If you can afford to sell three ten- 
cent articles for a quarter, ten cents is too high for 
one — to get business, unless three for a quarter 
is your established basis, as in the case of articles 
sold in sets or groups of three or more. 

The author saw advertised in a store recently 
a certain article at 15 cents or "three for 35 
cents". If 35 cents represented a satisfactory net 
profit (?), how much more business the merchant 
would do if he offered it at 12 cents straight, the 
article in question not being one the selling basis 
of which would naturally be three for 35 cents. 



134 



The Two-and-Three-for-a-Quarter Idea XVI 



Many persons would buy one who could not use 
three. 



Do a Little Figuring 

The idea of selling two or three for a quarter 
with a view to increasing profit is wrong. No 
clerk can sell three articles in the same time he 
can sell one. More time is necessary for the han- 
• dling and more paper and twine are necessary, 
as a rule, for wrapping, and the increased time 
means increased overhead in other items of ex- 
pense as well. 

On the assumption that it will take a clerk two 
minutes to receive an order for one ten-cent 
article, wrap it, make the change, etc., it will take 
a longer time to make a sale of three articles of 
the same kind. 

But, assuming, for the sake of argument, that 
it can be done in the same time, let us figure : An 
article costing the merchant 7% cents sells for 
10 cents, yielding a gross profit, as above stated, 
of 25% — 20% to cover expenses and 5% net. 
Now, the same clerk sells three articles for a 
quarter to the same customer (total cost 22% 
cents; sale price 25 cents; gross profit 2% cents) 
at a gross profit of 10% — half what it costs 



135 



XVI How to Figure Profit 

to do business if the expenses are 20% to sale 
and the proportion of the one to the other is cor- 
rect. It is understood that the clerk is working 
to his fullest capacity in selling straight. 

It is a Human Impossibility 

Now, can the same clerk, consistent with good 
salesmanship, make two to three times as many 
sales on a basis of three for a quarter as he could 
in selling straight? Do not forget that two to 
three times as many customers must be served 
(otherwise the clerk will be idle one-third to two- 
thirds of the time), since the person buying three 
for a quarter will buy less frequently, consuming, 
approximately, the same quantity he would if he 
bought straight. It is a human impossibility. 
Doubling or trebling sales means a proportionate 
increase of expense in store capacity, store fur- 
nishings, shelf space, paper, twine, heat, light, 
clerical service, freight, express and cartage-in, 
insurance, taxes, interest on investment (for a 
larger stock must be carried), etc., etc. 

It Spells Ruin 

The merchant may put it down as a settled fact 
that, if his expenses are down to a point where 



136 



The Two-and-Three-for-a-Qviarter Idea XVI 

they ought to be — in proportion to sales, and they 
amount to, say, 20% of sales, and he sells, at a 
gross profit of 20%, he may run his sales into 
the millions and he will be no better off than when 
he began if as well. On the other hand, if his 
gross profit is below 20%, as in selling three for 
a quarter, he will lose money on every sale he 
makes and it will be only a question of time when 
his surplus capital will have been used, his stock 
reduced and, after paying his obligations, he will 
be without a cent. 

Of course, all who sell certain articles on a basis 
of three for a quarter may not sell a sufficient 
quantity to cripple their business. They may sell 
certain other articles at a sufficiently high profit 
to make up. But neither practice is good busi- 
ness; it is not the way to draw trade; it is not the 
way to increase sales; it is not the way to make 
money. It may hold a customer in certain lines, 
but lose him and others in certain other lines. 

Some Articles Must be Sold at a Loss 

It is well known to merchants, of course, that 
certain articles, by reason of market and other 
conditions, must of necessity, at least at times, 
be sold at a loss, but this loss must be carried by 



137 



XVI How to Figure Profit 

certain other articles — good sellers. Such sales, 
however, should be the exception, not the rule, and 
this exception should be taken into consideration 
in determining the per cent of expense to sale; at 
least, the average gross profit must equal the ex- 
penses, deductions and mark-downs and a reason- 
able net profit besides. 

A Retail Business Which is Being Discussed 

Bear in mind that it is a retail business which 
is being discussed here. Of course, a manufac- 
turing or a wholesale or a jobbing business may 
be discussed from a similar point of view, the ex- 
penses to be in proportion to volume. That is, 
the volume of sales and the expense to this volume 
must be taken into consideration. The per cent 
of profit on each dollar's worth of goods sold may 
not be the same as in a retail business, or as in 
any other business of a different nature, but it 
must be sufficient to bring the volume up to a 
point in proportion to sales. 



138 



XVII 

Net Profit the Same W^hether the Town 
or the Business be Large or Small 



The Impression is Wrong 

The impression seems to be very general that 
merchants and manufacturers in small towns can 
sell more cheaply than those in large towns or 
cities; or that, in selling at the same price, they 
can make more money, by reason of the fact that 
their expenses are less — rent, clerk hire, etc. But 
this impression is wrong. It may seem logical in 
theory, but it will not work out in practice. 

The impression seems to come from the fact 
that expenses in the aggregate in small towns are 
less than the expenses in the aggregate in large 
towns or cities, which is true, but the fact must 
not be lost sight of that sales in the aggregate are 
also less. 

The Proportion the Same 

The investment, expenses and sales in a small 
town bear the same relative proportion to those 



139 



XVII How to Figure Profit 

in a large town or city, and hence the net profit 
on each dollar's worth of goods sold should and 
will be approximately the same under like methods 
and conditions. 

In other wor3s, a business in a small town 
with a capital of $5000, expenses $4000 and sales 
$20,000 will yield the same profit, relatively speak- 
ing, as a business in a large town or city with the 
same capital, expenses and sales. Such a business 
in a large city will be in a location where the ex- 
penses will be about the same as those of the busi- 
ness in a small town; or, if comparison of a busi- 
ness in a small town be made with a like business 
in a corresponding location in a large town, it 
must be on a basis of sales, not on an equal basis. 

In other words, again, a merchant in a small 
town must be compared with one doing the same 
volume of business in a large town, if the com- 
parison is to be made on an equal basis, and not 
with one doing ten to two hundred times the vol- 
ume, unless the comparison be made on a percent- 
age basis. If this were not true, merchants in 
the large towns would move to the small towns, 
whereas the tendency seems to be the other way, 
not because the expenses are greater or less, but 
because of the greater opportunity for growth and 
expansion — for larger sales in a more densely 



140 



Net Profit Not Affected by Size of Business XVII 

populated center. The per cent of net profit may 
be the same, but the volume of net profit will 
go up with the sales. 

Saks in Proportion to Expenses 

In substantiation of the contention so many 
make that the merchant in the small town can 
out-sell the merchant in the large town, they cite 
the enormous expenses of the merchant in the 
large town, forgetting that the sales are in pro- 
portion to the expenses and that the opportunity 
for buying (direct) at a closer figure increases 
with the sales. 

Of course, if the expenses of the merchant in 
the large town were double those of the mer- 
chant in the small town and the sales no higher, 
it would be only a question of months until his 
capital would be used and he would find himself 
in the bankruptcy court. 

Regardless of the town in which a business is 
located, the capital, expenses and sales must be 
in proportion in or3er to yield the net profit to 
which every business man is entitled. 

The selling price is regulated in most lines by 
competition or by supply and demand, therefore 
prime cost must be in proportion to the selling 
price. If below standard by reason of volume, it 



141 



XVII How to Figure Profit 

increases the profit ; if above standard, it decreases 
the profit — on the supposition, of course, that the 
selHng price is the result of correct figuring. 

Expenses May be Too High or Too Low 

So, also, expenses must be in proportion to sales 
volume. If expenses are too high for the volume 
of business, it means the cutting down or cutting 
out of net profit, if not indeed doing business at 
a loss. If expenses are below standard, it means 
the increasing of net profit, provided the sales are 
not decreased as a result. 

It is possible to increase the expenses of a busi- 
ness recklessly, unnecessarily, unwisely; but, while 
this is true, there is a certain point below which 
it is not safe to go without the risk of lessening 
the sales and the net profit accordingly. Cutting 
clown expenses, in other words, may be in the line 
of good business or bad business. 

When the selling price is fixed by economic con- 
ditions, attention must be centered on the prime 
cost and expenses in order to make a reasonable 
net profit possible. Of course, equally important 
is attention to the turning of stock and to collec- 
tions, while, if a selling price below a reasonable 
retail standard is fixed for the purpose of m- 



143 



Net Profit Not Affected by Si^e of Business XVII 

creasing the volume, the methods o£ the mail order 
house must be applied in buying and in selling if 
the same net profit or more is to be realized, which 
is impossible in most retail businesses, there not 
being the same opportunity for increasing the 
sales. 

The Change is Good Business 

The question may be asked, Why is it that mer- 
chants in large cities so often move from the so- 
called heart of the city to points outside? It is 
because of land values — to save the difference in 
rent or in interest on investment. They figure 
that they can draw as large a volume of trade in 
the less expensive as in the more expensive loca- 
tion, and, if they can, the change is good business. 
The less expensive location gives them room for 
expansion at an expense within the volume of 
their sales. As a rule, people will not object to 
going a few blocks to get what they want at a 
price they want to pay. 

In a densely populated city or community, how- 
ever, the business center is not confined to one 
corner or to one street or to one block, though 
certain lines of business may be and usually are. 

And what is true of a business in a small town 



143 



XVII How to Figure Profit 

contrasted with a similar business in a large town 
is also true of a small business contrasted with a 
large business of the same kind in the same town, 
whether small or large. The relative proportion 
of expense to sale will or should be about the same. 

Expenses Should Increase Sales 

Every business, wherever located, should be 
worked to the highest point its expenses will 
bear. In other words, the expenses should in- 
crease the sales and, whenever an item of expense 
will mean increased sales, it should be incurred; 
that is good business, since the larger the sales 
the larger the volume of net profit, if the articles 
are sold at a price that will yield a net profit — if 
the expenses are in proportion to sales. 



144 



XVIII 
Good Buying a Factor in Net Profit 



First 



There are perhaps more good salesmen than 
good buyers. A person may be a good salesman 
without possessing the qualities which make for 
good buying, but the reverse is not necessarily 
true. A person cannot be a good buyer without 
knowing the selling qualities of what he buys, the 
selling capacity of his business and the likes and 
dislikes of his customers. If he buys an article 
which will not sell at a reasonable net profit, or 
in a larger volume than can be sold promptly 
(except in an abnormally rising market, as during 
the past two years), or city goods for country 
trade, or country goods for city trade, he is not 
a good buyer. 

Regardless of the size of the town in which the 
business is located, the customers and probable cus- 
tomers must be considered. A business may cater 
to a certain class of trade or to all classes, but this 
must be taken into consideration in buying. 

All customers like to have something out of the 
ordinary for their money, and, if the buyer can 



145 



XVIII How to Figure Profit 

meet their tastes and keep within the price they 
can pay, he will increase the volume of net profit, 
if not indeed the per cent as well. 

Good taste, as well as good judgment, is a 
quality necessary to good buying. 

Second 

Again, it does make a difference where we buy 
and as to the quantity in which we buy. It does 
make a difference whether we buy direct — from 
the producer or manufacturer, as the case may 
be — or thru middlemen ; and, in either case, quan- 
tity counts. The small buyer cannot hope to get 
the same price that large buyers get. This does 
not mean that the seller eliminates net profit for 
the sake of increasing his sales, as do retail mer- 
chants who sell two and three for a quarter. It 
does mean, of course, that there is not a uniform 
per cent of gross profit on all sales ; but the lowest 
is, or should be, satisfactory from the viewpoint 
of the seller and the highest reasonable from 
the viewpoint of the buyer, quantity considered, 
and the average about what it should be from 
the viewpoint of good business and investment. 
Wholesaling and retailing are two different prop- 
ositions. 



146 



Good Buying a Factor in Net Profit XVIII 

There Must be a Net Profit — As stated in a pre- 
vious chapter, if the sales represent a net profit, 
however small, an increase in volume means an 
increase in the volume of net profit. But, if 
net profit is wholly eliminated, the sales may be 
doubled and trebled and the business will be no 
better off. It may hold its own, but it will make 
no money. If the increasing sales call for ad- 
ditional capital, the investors must put it up, which 
will mean a reduction in the rate of interest on 
investment. 

There is a Difference — The practice of producers, 
manufacturers, wholesalers and jobbers to quote 
prices on a basis of volume, which they may, 
within certain limits, be able to do with safety, 
leads small dealers who buy of them to think they 
can do the same, forgetting that those of whom 
they buy practically fiyi for them the selling price 
and at a figure below which they cannot, ordi- 
narily, go without losing money; and forgetting, 
further, that there is a difference between manu- 
facturing or wholesaling and retailing. 

Not all manufacturers or wholesalers, of course, 
have a sliding or volume scale of prices. Some 
hold to one price regardless of the volume in 
which sales are made. They may cater to a par- 
ticular class or to the general trade, but they 
make one price to all. 



147 



XIX 

The Per Cent to Add to Cost to Get the 
Per Cent of Profit Desired 



Assuming that you know the average gross 
profit you must make on total sales, and that your 
practice is to mark up on a basis of gross profit 
rather than on that of the selling qualities of the 
goods you buy, how will you mark the articles to 
produce that profit? In other words, what per 
cent added to cost will produce the gross profit 
you desire to make? 

For example, if an article costing, say, $2.80 
is to yield you a gross profit of, say, 30%, at what 
price will you sell it? What per cent will you 
add to cost? How are you to know in the case 
of each article you mark what per cent to add to 
cost to produce the desired profit? 

The selling price is always 100%. Subtract 
from this the per cent of gross profit you desire 
to make and you will have the cost in per cent. 
In the preceding example, 70% (100%— 30%) 
equals $2.80. Therefore, 1% equals 1/70 of $2.80 
or $0.04 and 100% (the selling price) equals 100 
times $0.04 or $4.00, the price at which the article 



148 



Per Cent to Cost to Get Per Cent of Profit XIX 

must be sold to yield a profit of 30%. Proof: 
30% of $4.00 is $1.20. $4.00— $1.20=$2.80, the 
cost. 

This IS the result by analysis, but the process 
is too long. A quicker and a better way would be 
to take the desired profit (in this case 30%) as 
the numerator and the cost (in this case 70%, 
which is 100% minus the gross profit, 30%) as 
the denominator and reduce the fraction to its 
lowest terms and increase the cost by this result. 

Still another way (same principle) is to use 
equivalents. For example, 30% gross profit is 
equivalent to 30/100 or 3/10 and the fraction to 
add to cost to produce this is Z/? (7 being the 
denominator of 3/10 minus the numerator). In 
other words, reduce the per cent of the gross 
profit desired to a common fraction, subtract the 
numerator (which is to be retained as the numer- 
ator of the new fraction) from the denominator 
and the result will be the denominator of the frac- 
tion by which the cost must be increased. 

For example, to make % (33%%) on sale, add 
% (3 — 1=2) to cost, to make % on sale, add I/3 
(4 — 1=3) to cost, and so on. Regardless of the 
fraction representing the profit you desire to make, 
subtract the numerator from the denominator and 
you will have the denominator of the fraction to 



149 



XIX How to Figure Profit • 

add to the cost or by which the cost must be in- 
creased. In business, the gross profits commonly 
made (sale over prime cost, deductions not in- 
cluded) are %, ^, I/3 and l/^. From these sub- 
tract the numerator (1) from the denominator 
(5-4-3-2 respectively) and you will have the de- 
nominator of the fraction to add to cost or by 
which cost must be increased — ^4) %> % ^^^ V^ 
respectively. 

Another way, and a very simple one too, is I0 
divide the cost by the cost per cent expressed deci- 
mally; as, $2.80 (cost) divided by .70 (cost per 
cent expressed decimally) equals $4.00, the selling 
price. Any cost price divided by the cost per 
cent, which is 100% minus the gross profit de- 
sired, will give the selling price. 

The 30% gross profit mentioned above is the 
average qn total sales. Not all articles you sell 
will produce this per cent — some more, some less. 
You will sell some articles at a gross profit of as 
low as 20% or less, while certain other articles 
will yield you a gross profit of 40% or more. 

You should therefore know the selling qualities 
of each article you sell and the average gross 
profit you must make and mark up accordingly. 
You should anticipate the sales of each depart- 
ment of your business and ascertain in advance 



150 



Per Cent to Cost to Get Per Cent of Profit XIX 

i£ the average gross profit will be satisfactory. 
You should also verify your figures weekly and 
monthly. 

For specific metHoS's of figuring and tabulating, 
see Chapters XXII, XXIII and XXIV. 

Per Cent of Profit Known; Per Cent to Cost Unknown 

When you wish to know the per cent to add to 
cost to produce the per cent of gross profit you 
desire to make, use, as a basis, the following table 
of equivalents: 



To make 5% 


{V20 of 100%) 


on sale add H9 


to cost. 


To make 10% 


0/10 of 100%) 


on sale add % 


to cost. 


To make 12V2% 


(i/s of 100%) 


on sale add Vi 


to cost. 


To make 15% 


(%0 of 100%) 


on sale add %7 


to cost. 


To make i6%% 


{Vq of 100%) 


on sale add V^ 


to cost. 


To make 20% 


(I/5 of 100%) 


on sale add % 


to cost. 


To make 25% 


(M of 100%) 


on sale add Vz 


to cost. 


To make 28% 


(^25 of 100%) 


on sale add Vis 


to cost. 


To make 30% 


(%0 of 100%) 


on sale add % 


to cost. 


To make 33%% 


(I/3 of 100%) 


on sale add ^ 


to cost. 


To make 35% 


(7/20 of 100%) 


on sale add %3 


to cost. 


To make 40% 


(2/5 of 100%) 


on sale add % 


to cost. 


To make 50% 


(1/2 of 100%) 


on sale add Vi 


(100%) to cost 


To make 66%% 


(% of 100%) 


on sale add Vi 


(200%) to cost 



In like manner, the equivalent denominator of 
any per cent on sale may be gotten by subtracting 
the numerator (which should be retained as the 



151 



XIX 



How to Figure Profit 



numerator of the new fraction) from the denomi- 
nator — the per cent on sale changed to fractional 
form. 

Per Cent to Cost Known; Per Cent of Profit Unknown 

When you wish to know the per cent of gross 
profit any per cent added to cost will produce, use, 
as a basis, the following table, which, in principle, 
is the reverse of the preceding table: 

is V20 ( 5%) on sale. 

is Via (10%) on sale. 

is % (i2l^%) on sale. 

is %o (15%) on sale. 

is % (i6%%) on sale. 

is % (20%) on sale. 

is ^ (25%) on sale. 

is %5 (28%) on sale. 

is %o (30%) on sale. 

is Vz (33%%) on sale. 

is V20 (35%) on sale. 

is % (40%) on sale. 
(100%) added to Cost is V2 (50%) on sale. 
(200%) added to Cost is % (66%%) on sale. 



^4 



Vid added to Cost 

Yd added to Cost 

H added to Cost 

%7 added to Cost 

% added to Cost 

added to Cost 

added to Cost 

^s added to Cost 

% added to Cost 

% added to Cost 

Vis added to Cost 

% added to Cost 
Vi 
% 



In like manner, the equivalent denominator of 
any per cent added to cost may be gotten by add- 
ing the numerator (which should be retained as 
the numerator of the new fraction) to the denomi- 
nator — the per cent added to cost changed to frac- 
tional form. 



152 



Per Cent to Cost to Get Per Cent of Profit XIX 

Only a Few Equivalents Necessary 

Since the staple lines of merchandise stock in 
most businesses may be so divided or department- 
ized as to yield a fairly uniform gross profit on 
the sales in each division or department, in buying 
for or in marking the goods belonging to each 
division or department the merchant, in order to 
mark up intelligently, will need to familiarize 
himself with only a few equivalents (since the 
marking must be on a basis of the selling quali- 
ties of the article), which may be expressed in 
common or decimal fractional form, as may be 
preferred. 

For example, if 25% gross profit is desired, 
this may be written in common fractional form, 
as ^, or in decimal form, as .25 and the equiva- 
lent fraction by which the cost shall be increased 
may be written as % or as ,2>2>y^ or .3333. In the 
case of %, %, 14? %> % aiid 1/1 the common 
, fractional form as here written will be found the 
more convenient. 

The change from common to decimal fractional 
form is effected by dividing the numerator by the 
denominator. The change from decimal to com- 
mon fractional form is effected by striking out 
the decimal point or period, drawing a horizontal 



153 



XIX How to Figure Profit 

line beneath the figures, writing beneath this 100 
or 1000, as the case may be, and reducing the 
fraction to its lowest terms by division. 

The merchant who is skilled in marking goods 
for sale can perform these operations mentally 
and instantly. 

Of course, all goods in any one department do 
not sell at a uniform per cent of gross profit. If 
they 3o, the department manager is not a good 
salesman, he has not made a careful study of the 
selling qualities of the goods he handles or of the 
likes and dislikes of his customers. But the per 
cent of profit on staple articles of a kind or class 
will be fairly uniform. 



154 



XX 



Percentage and Price Lot Methods of 
Figuring Profit on Daily Sales 

Mercantile Businesses 

Technically speaking, it may be stated that all 
persons engaged in trading lines are merchants, 
yet the same methods of figuring profit or of cost 
keeping will not be found in all trading businesses 
keeping a cost system. 

In businesses commonly known as mercantile, 
such as clothing, furnishings, dry goods, grocery, 
hardware, shoe, furniture, drug, fruit, candy, etc., 
one of two methods may be employed in the keep- 
ing of a cost system, namely, Percentage or Price 
Lot, although these two methods may not work 
equally well in the businesses mentioned. Both 
methods are reliable, however, and one or the other 
may be applied to any mercantile business, whether 
large or small ; and, with slight modification, to any 
trading business or to any manufacturing business. 

Store Organization and Management 
From the viewpoint of organization and man- 
agement, mercantile businesses are Independent, 
Dependent or Interdependent. 



155 



XX How to Figure Profit 

An Independent business or store is one which 
is devoted to some specific or special line, as gro- 
ceries, clothing, shoes, etc., independent of any 
other line or lines. While such businesses are to 
be found principally in the smaller towns and 
cities, they are to be found also in the larger 
towns and cities, frequently on a large scale too, 
and in larger numbers than any other form of 
store organization. 

The magnitude of an Independent business may 
be large or small and the proprietorship individ- 
ual, partnership or corporate. 

A Dependent business is one organized as a 
branch of another business in the same or in a 
different locality. 

An Interdependent business may be said to be 
a combination of two or more Independent busi- 
nesses under one roof and management. Such a 
business is commonly known as a Department 
Store, although the idea of Hepartmentization is 
much broader than this. It comprehends not only 
the grouping of merchandise into distinct lines, 
but the subgrouping into distinct kinds as well, 
which enables the management to keep in close 
touch with the selling qualities of the several lines 
and kincis of goods carried. 

While, from the standpoint of financial control 



156 



Percentage and Price Lot Methods XX 

and management, the several distinct store units 
which go to make up an interdependent business 
constitute one store on a large scale; yet, from 
that of stock investment, expense outlay and earn- 
ing power, these units are Independent stores, the 
manager of each being allowed a certain amount 
of capital with which to run the business, and he 
is expected to make good. 

Departmentization 

Whether the business be Independent, Depend- 
ent or Interdependent, in order to figure profit 
intelligently and accurately, a correct record of 
purchases, sales and gross profit — as well as ex- 
penses — must be kept. 

The departmentization and subdepartmentiza- 
tion of a business should be governed, in large 
measure at least, by the magnitude of the busi- 
ness and the number of clerks employed. The 
larger the business the more minutely it can be 
departmentized and the more accurately the sell- 
ing qualities of the stock carried can be traced. 

Of course, a business which starts in a small 
way must and should departmentize and add to 
its clerical force by degrees. But a high degree 
of system may be put into practice in a business 
not large enough to employ even two clerks. 



157 



XX How to Figure Profit 

While a large business demands system, a small 
business is entitled to it and should have it. 

In other words, whether the volume of sales 
be large or small or the business located in the 
large city or in the smallest rural town, as high 
a degree of system may be used in an Independ- 
ent business as in a Dependent or an Interde- 
pendent business — if the management understands 
system and can appreciate its value. 

Percentage Method 

It IS not necessary to explain here what per- 
centage means. It is clear alike to business men, 
to teachers and to students. But it is necessary 
to explain how to apply percentage to a selling 
business or to a producing business. 

Methods of Keeping Track of Sales 

Cash Register — ^While in large mercantile busi- 
nesses there is only one method of keeping track 
of sales, namely, by means of Sales Tips, in small 
businesses other means may and of necessity must 
be employed. A very effective means is the Cash 
Register if it is of the right kind, if it registers 
the cash and time sales, and if, further, discounts, 
mark-downs, stock, etc., are properly kept track 
of. Keeping track of sales alone is not enough; 
a simple cost system is necessary. 



158 



Percentage and Price Lot Methods XX 

Sales Slips — A step in advance of the cash reg- 
ister (both may be used) in a business large 
enough to warrant it (sales, say, of $20,000 and 
upwards) is the use of small Sales Slips, on 
which the clerk writes the amount of each sale, 
and a cashier to take care of these Sales Slips 
and make the change. When more than one clerk 
is employed, it is better to have these Slips num- 
bered, so as to keep track of the sales which each 
clerk makes. The importance of this is obvious. 

The person who acts as cashier can, if rightly 
trained, keep a simple cost system, or at least with 
a little assistance from the management. 

Sales Tips — The ideal way of keeping track of 
sales, however, where the departmentization and 
the number of clerks employed warrant it, is by 
means of Sales Tips, which most merchants at 
least have seen and understand, and by the use 
of which the sales of each department are kept by 
themselves, and the sales of each clerk in each 
department are known. 

Basis for Determining Gross Profit 
ON Sales 

Since the stock in a store does not sell at a 
uniform per cent of gross profit, it is not easy for 
business men who do not keep a cost system to 



159 



XX How to Figure Profit 

determine with any degree of accuracy (and any- 
thing short of accuracy is deceiving) the average 
per cent of gross profit which they make on daily 
sales. 

Some advise departmentizing accorSing to the 
respective per cents of gross profit made in sell- 
ing. In other words, they would divide the stock 
of goods into, say, three to possibly eight depart- 
ments, depending upon the line or lines carried, 
and keep track of the sales in each department. 

While this may be done, it accomplishes nothing, 
involves unnecessary work, and leaves the mer- 
chant in the dark as to the value of the unsold 
stock. Why, therefore, substitute something not 
so good for something better? The methods of 
large businesses, of successful business men, can- 
not well be improved upon, except as they them- 
selves improve them thru the necessities of their 
business and the aid of skilled accountants. And 
do not think for a minute that what will work in 
a large business will not work in a small business 
with slight modification or in principle at least. 

Therefore, instead of departmentizing on a basis 
of per cent of gross profit, keep proper track 
of merchandise — purchases, sales and inventory. 
Enter in your stock record (card or book) by 
departments, if you departmentize, the purchase 



160 



Percentage and Price Lot Methods XX 

and selling prices of every invoice you receive, 
and see that the selling price represents a satis- 
factory gross profit. Do not rely wholly upon 
your judgment as to the selling qualities of the 
goods you buy. 

Keep track of discounts, mark-downs, etc., as 
they occur. 

Keep track of the daily sales — amounts only for 
this particular purpose; but for the purpose of 
keeping track of stock a unit record should also 
be kept, the method depending entirely upon the 
nature of the business and the system employed. 

At the close of each week, bring to a merchan- 
dise summary sheet the cost and selling-price foot- 
ings of all purchases for the week, plus carrying 
expense, less discounts and mark-downs (from 
selling price). To these footings should be added 
the footings at the beginning of the week. Get 
the per cent of gross profit which the selling price 
represents — the difference between the cost and 
selling prices divided by the selling price. This 
will be the per cent you made on your sales for 
the week. Total your sales and deduct the gross 
profit resulting from this per cent. The remainder 
will be the cost of sales. 

The cost and sale footings of the week's sales 
should now be subtracted from the week's basis 



161 



XX How to Figure Profit 

(purchases and previous inventory) and the dif- 
ference will be the basis for the next week, and 
so on from week to week. 

In brief, this is the proper way of keeping track 
of sales by the percentage method. And it is so 
simple as to be applicable to any business, large 
or small. The time required to keep track of 
stock in this way will not average twenty min- 
utes a day. 

For the actual operations of a week's business, 
see Chapter XXIV. 

It is important of course that you ascertain if 
the per cent of gross profit on the week's sales is 
large enough to cover the total expense (mer- 
chandise deductions not included) to sale and leave 
you a net profit of 5% to 10%. Compare the 
two per cents. 

Price Lot Method 

By this method one can tell the per cent of 
profit he makes on every article he sells, and on 
the total sales for the day, by adding the Gross 
Profit and the Sale Price columns (Figure 4) and 
dividing the former by the latter. 

This method is especially adapted to furniture, 
clothing, shoe and similar businesses whose prices 
are not changing from day to day and whose sales 
are not uniformly small. It involves slightly more 



162 



Percentage and Price Lot Methods XX 

work than the percentage methoS, yet any business 
large enough to warrant the keeping of a person 
to make change can use it. 

The principle is this: On every article received 
into the business is placed a sales ticket or label 
on which is written, in addition to the manufac- 
turers' "Lot" number, if the article has one, a 
*'Stock" number, as for example, ''Stock No. 101", 
and the sale price in plain figures, say, $4. The 
Stock number is the "key" to the cost price. If 
the article, for example, is a certain hat (Lot No. 
486— Stock No. 101— Price $4), in selling this 
hat the sales clerk will write on the Sales Tip the 
"Stock" number and the "Sale" price only. 

The Stock number should be written on a page 
of a small book (designated as "Cost Key") and, 
to the right of this number, the Cost price, say, 
$3, and, to the right of this, the Selling price, 
say, $4; as, for example, 101 — $3 — $4. This 
means that Stock No. 101 cost $3 and sells for $4 
and that the sales clerk cannot deviate from this 
price without the manager's o. k. being on the 
Sales Tip. 

When the Sales Tip for the sale of this hat, or 
any hat from this Lot number, comes to the cash- 
ier's desk she will write in a column of a cheap 
book which she will keep for the daily sales (Fig- 



163 



XX 



How to Figure Profit 



STOCK NO- 



SALE PRICE 



Cost 



GROSS PROFIT 



AMOUNT 



PER CENT 



/Of, 



<3 



/■ 






/ 
/ 

/ 



/o 



7'^'^.' 






/3 Vb 



nA 



^knl^^//>-f 



Figure 4 



Price Lot Method of Figuring Profit. 



164 



Percentage and Price Lot Methods XX 

ure 4) the "Stock'' number and, in a column to 
the right, the "Sale'' price and, in a column to the 
right of this, the "Cost" price, which she gets 
from the Key thru the Stock number, the Stock 
number and Sale price only being on the Sales Tip. 

The Key contains the stock number and the 
cost and selling prices of every article in the store 
and, being in numerical order, the stock numbers 
will give the cost instantly. The "Hat" division 
of the cashier's cost record, for example, at the 
close of the day, will look something like Figure 4. 

The per cent column shows the per cent of gross 

profit on each article sold and the average for 
the day. 

If the expense of doing business and other 
charges and deductions are, say, 23%%, more 
or less, the net profit on the day's sales will at 
once be seen — in this case 5%; 281/^% — 231/2% 
=5%. 

The per cent of gross profit on each sale may 
or may not be carried out, but that on the total 
sales for the day should. 

By this method, there will be no possibility of 
figuring the per cent of gross profit on each article 
sold above or below what it should be. It will be 
exact. The cost and quantity of the sales and the 
unsold goods will also be exact — if proper record 
is kept. 



165 



XX How to Figure Profit 

While a specially ruleH book is desirable for 
keeping this record, it is not necessary. Any 
cheap blank book may be ruled by hand. 

The Cost Key (Stock Number) should be in a 
book or on a sheet convenient for quick reference 
by the cashier as she copies the sales from the 
Tips. And, by the way. Sales Tips suitably ruled 
and printed should be used. 

A duplicate of this Key should be kept by the 
manager in a small vest-pocket book for conven- 
ient reference during business hours, but it would 
better be kept in the safe at night. 

The Stock number may begin with, say, 101 
and run into the thousands if necessary; that is, 
for each department, or for the total stock, as may 
be preferred. Each distinct group of articles of 
a certain lot or manufacturer's number costing 
the same price and selling at the same price may 
be given the same stock number. 

Of course, there are many ways of applying 
this method, the above being only one. A com- 
mon way is to write on the tab or label, as the 
stock number, the cost figures in reverse or trans- 
posed order, but this is not wise, the cost being 
too easily deciphered. 

Another way is to use letters or symbols, or 
words represented by figures, but these also are 
easily deciphered. 



166 



Percentage and Price Lot Methods XX 

Orders should be placed daily or weekly or as 
often as may be necessary for replenishing stock 
on a basis of the kind and quantity sold as shown 
by the "Stock No/' column recapitulated on a 
stock sheet for this purpose. 

Manufacturing Businesses 

It is comparatively easy to figure profit in a 
manufacturing business if correct cost records are 
kept. The method is practically the same as the 
'Trice Lot" method in a mercantile business. 

The cost to manufacture each article is known. 
The cost to sell the article and other charges are 
also known. The net profit, therefore, depends 
upon the price at which the article can be sold. 

By means of a sales sheet, the sales are entered 
daily as made — cost and sale prices. The differ- 
ence between these two sets of figures, which 
should be taken once a month for ledger and 
statement purposes, is Gross Profit, which, if 
divided by the sales will give the per cent. 
Deduct the Commercial Expenses and Direct 
Charges and the result will be the Nominal Net 
Profit. Divide this by the sales and the result 
will be the per cent. 



167 



XXI 
The Turning of Investment 



What Turnover Means 

Turnover is a term much used by merchants 
and manufacturers, but Httle understood either 
as to meaning or value. 

While, in itself, the term means nothing to the 
business man, yet, with certain modifications, it 
means everything. Indeed it is the pulse of a 
selling business, and may spell success or failure, 
depending upon how closely it is watched. 

The number of times a business man turns his 
investment means nothing in itself but when each 
turnover represents a reasonable net profit and 
the keeping of every item of stock in the store 
moving, it spells success. 

For example, if a merchant turns his invest- 
ment of, say, $30,000 once at a gross profit of, 
say, $6000 (20%— Sales $36,000) it means little 
or nothing to him, since it represents a gross 
profit of scarcely enough to meet his expenses; 
at least, the expenses of most retail businesses 
will nor exceed 20%. But, if he turns his invest- 



168 



The Turning of Investment XXI 

ment of $30,000 once at a gross profit of $15,000 
(331/3%— Sales $45,000) it will show him that the 
oftener he turns his investment the more money 
he will make. 

Aside from this, however, turnover means 
nothing as a yearly result or operation; and, since 
this is true, what should concern the business man 
is the weekly per cent and volume of gross and 
net profit which his sales produce him and the 
proportion of stock investment to sales, rather 
than simply the number of times he turns his 
investment. 

They Have the Wrong View of It 

It is safe to say that fifty to seventy-five per 
cent of retail merchants give little or no thought 
to the study of turnover in the sense in which it 
is understood and watched by the big merchants, 
while perhaps ninety per cent of the others do not 
figure correctly and are as much in the dark as 
if they did not figure at all. They seem to place 
more stress upon the number of times they turn 
a dollar than upon the volume of gross and net 
profit which the turning of the dollar should rep- 
resent to them. 

The correctness of these statements may be 



169 



XXI How to Figure Profit 

seen from the fact that, of those who engage 
in business, only two to four out of every one 
hundred succeed in the sense in which success is 
understood and measured. They figure turnover 
as they figure profit — on the wrong basis if at all. 

Capital and Stock Investment Not the Same 

At the outset, a distinction must be ma3e, in 
speaking of investment or of turning investment, 
between capital investment and stock investment. 
The terms are not synonymous. Which of these 
terms is meant when merchants speak of turning 
'"capital" is problematic. 

Reference is frequently made to the turning of 
capital as applied to sales or simply to the relation 
of capital to sales; whereas, as a matter of fact, 
capital to sales means nothing to the business man 
except proportion — the proportion one should bear 
to the other. 

It is not the number of times a merchant turns 
his capital investment which should concern him, 
nor the number of times he turns his stock invest- 
ment, for that matter, unless he has in mind, in 
connection therewith, the per cent and volume of 
net profit to which his investment and reinvest- 
ment entitle him. 



iro 



The Turning of Investment XXI 

Capital investment, as a matter o£ fact, is fre- 
quently a small part of the capital employed in a 
business. Earnings left in, money borrowed and 
credit received must be taken into consideration. 

The author has in mind a certain business whose 
actual invested capital is less than $4000, yet its 
annual sales run over $100,000. 

The thing which should concern the business 
man, therefore, is the turning of his investment 
in stock, or merchandise, as fast as close atten- 
tion and application to business and a reasonable 
net profit will enable him to turn it. 

Turnover in a Trading Statement 

The term turnover as used in a trading or a 
manufacturing statement means the cost of the 
goods sold. This divided by the stock invest- 
ment will give the number of times the investment 
has been turned. But of what value is it to the 
business man to know the number of times he has 
turned his stock if each turnover does not repre- 
sent a reasonable net profit? A merchant may 
turn his stock fifty times a year, but if each turn- 
over does not represent a reasonable net profit he 
will be no better off than if he had not turned 
it once. 



171 



XXI Hozv to Figure Profit 

What Stock Investment Means 

But, again, what is meant by stock investment? 
It does not mean, necessarily, the value of the 
stock at the time of beginning, for, while the stock 
is replenished as sold, the purchases may be in 
excess of the cost of sales, thereby increasing the 
investment, or they may be less, thus decreasing 
the investment. Nor does it include the invest- 
ment in buildings, fixtures, expense items, etc., 
but in stock, or merchandise, as shown by a cor- 
rect average of the previous inventory and the 
purchases, regardless of the proportion of cash 
and credit investment which this average repre- 
sents. 

Attention Should Be Directed to Stock 

Taking a concrete illustration, let us assume 
that A, who is starting in business, invests $5000 
as follows: $800 in furniture and fixtures; $200 
in items of expense necessary in selling; $3000 in 
merchandise (cash down), and $1000 in the bank 
as a surplus to be used if needed while getting 
started. 

Now, his capital investment is $5000 and his 
stock investment is $3000. While it is important 
that he take proper care of the store fixtures and 
watch the expense items and not draw on the 



172 



The Turning of Investment XXI 

$1000 in the bank unnecessarily, it is to the $3000 
invested in merchandise that his attention should 
be especially directed. He should turn this as 
often as ability, good salesmanship and close at- 
tention to details will enable him to turn it, on 
the assumption that every dollar's worth of goods 
he sells represents a reasonable net profit, and 
that his weekly, monthly and yearly sales reach 
the point of reasonable proportion to the invest- 
ment in stock and to the expense of doing busi- 
ness. 

He started with a clean slate — a $3000 stock, 
paid for, $1000 in the bank and $1000 otherwise 
invested. Now, on the assumption that his sales 
will average him, say, 30% gross profit, and that 
he borrows no money, each dollar's worth of goods 
sold may be tabulated as in Figure 5. 

It is assumed here that the carrying expenses 
are 1% of the sales, that the commercial expenses 
are 19% of the sales, the total being 20%, and 
that the nominal net profit desired is 10% — a 
little high perhaps considering the per cent of 
expense to sale. 

Now, the item or items in the "Prime Cost" 
column represent a reduction (turning over) of 
the stock investment and the footing of this col- 
umn should be reinvested so as to keep the stock 



173 



XXI 



How to Figure Profit 



Prime 
Cost 



GROSS PROFIT 



EXPENSES 



CARRYING 



COMMERCIAL 



TOTAL 



NOMINAL 
NET PROFIT 



Sale 
Price 



lo 



Of 



li 



Vo 



It 



00 



Figure 5 
Sales Analysis Chart — Cash Business 

Note — This Chart, which Represents a Cash 
Business, is Intended to Guide the Merchant in Keep- 
ing Track of Turnover in the Sense of Replenishing 
Stock in Proportion to Sales and Watching Profit. 



m 



The Turning of Investment XXI 

up to the $3000 mark as closely as may be or in 
proportion to sales; that is, as the stock dimin- 
ishes, a new supply should be purchased and paid 
for on a basis of the footing of this column, tak- 
ing advantage of the discount allowed for cash, 
due allowance being made for the natural increase 
of stock due to increased sales, if the sales show 
an increase, and for "season" and "rising market'' 
purposes, etc. 

A Unit and Value Record 

In addition to the money value of the stock 
sold, track must be kept also of the different items 
or units of stock. It must be known what items 
are selling and what items are not in order to 
purchase wisely. If the prime cost of the sales 
for the day, for example, amounts to $75, it must 
be known what particular items of the entire stock 
have been sold before an order can be mailed to 
replenish the stock, or, in other words, to properly 
keep track of stock turnover. 

An item or unit as well as a per cent and value 
record should therefore be kept, whether by means 
of a stock record (card) system or a close watch 
by the clerks or a tabulation of the daily sales tips. 
The scheme which will enable the merchant, at 



ITS 



XXI How to Figure Profit 

the least expense, to supply the demand of his 
customers without overstocking or running short 
is the one to adopt. A merchant cannot afford to 
overstock, as the net earnings must be sufficient 
to make the capital investment profitable to the 
investor. 

Replenishing Stock 

Whether purchase orders be issued daily or 
weekly to replenish stock sold will depend entirely; 
upon how the stock is moving and where the pur- 
chases are made; but, one thing is sure, it should 
not be for a larger money value than shown by 
the 'Trime Cost'' column (Figure 5) for the time 
between the periods of ordering, except as war- 
ranted by increased sales or a rising market or 
season conditions, since, when the invoice comes, 
it must be paid from the money taken in as 
shown by this column, not as shown by the "Sale 
Price" column, and this is true whether the sales 
be on a cash or a credit basis, except that, if on a 
credit basis, the current cash alone will not or 
may not meet the invoice payments as they be- 
come due — cash basis. 

In other words, staple stock should be replen- 
ished on a basis of the cost of sales and increased 
only as warranted by net earnings. 



176 



The Turning of Investment XXI 

Basis of Expansion 

This does not mean of course that a business 
cannot or should not be run on borrowed capital 
or that money should not be borrowed for purchas- 
ing ahead or for expansion purposes. It means 
simply that the increase or expansion should be 
in proportion to or on a basis of net profit. That 
is, the amount in the "Total" expense column is 
needed to meet the running expenses of the busi- 
ness and should not be drawn on for any other 
purpose, while that in the "Nominal Net Profit" 
column should go towards interest on investment, 
the payment of dividends and the creating of a 
surplus fund if not used for expansion purposes. 

Increasing the stock to meet increasing sales or 
to take advantage of a rising market is good busi- 
ness, but overstocking is bad business. Therefore, 
unless we know what we are doing, unless we are 
guided by facts and figures, we should not increase 
stock out of proportion to sales. Placing orders 
ahead for "season" goods is of course a different 
proposition. This is good business if the merchant 
knows what he is 3oing. 

Credit Sales 

It is safe to say that, with retail merchants gen- 
erally, in small towns especially, the credit sales 



177 



XXI How to Figure Profit 

will run close to 40 to 50 per cent of the total 
sales. This is a great disadvantage and loss to 
the merchant. It means that he cannot discount 
his bills unless he draws on his surplus capital 
(if he has it to draw on) or borrows the money 
at the bank (if his credit is good), and, if he 
allows his customers a longer period of credit than 
he is allowed, as is so frequently done, even his 
surplus capital and credit may in time run out. 
Unrestricted credit has driven many a business 
to the wall, and the longer the period of credit the 
greater the chance for loss by failure of the cus- 
tomer to pay. If credit is allowed, it should be 
upon a reasonable certainty that payment will be 
made within a reasonable time — that allowed the 
merchant or less — and that bad accounts shall be 
reduced to the minimum. 

Stock Investment as Applied to Turnover 

As previously stated, stock investment does not 
mean necessarily the investment or inventory at 
the time of beginning. The purchases must be 
added to the inventory and from this result a cor- 
rect average determined; but few persons, by their 
method of figuring, arrive at a correct average. 

Procedure 
Assuming that the merchant starts with an in- 



178 



The Turning of Investment XXI 

ventory of $5000 and that his inventory at the 
close of the year is $5840, a book inventory not 
having been kept and a physical inventory or a 
statement of business not having been taken in the 
meantime, these two inventories should be added 
($10,840) and divided by 2 to get the average 
($5420). 

But once a year is the small merchant's idea of 
a statement period. Let us get down to a monthly 
basis, which does not mean the taking of a physi- 
cal inventory monthly, but the keeping of a cor- 
rect merchandise record, and this need involve 
but little time or expense — not to exceed twenty 
minutes a day. 

Assuming that the inventory at the beginning 
of the year amounted to $5000, as before, and 
that the twelve monthly inventories amount to, 
respectively, $5840, $5460, $5630, $6204, $5910, 
$5090, $6124, $6215, $5924, $6318, $6004, $6180, 
the sum of these thirteen inventories will be $75,- 
899. This result divided by 13 will give the cor- 
rect monthly average cost or investment for the. 
year. 

Proceeding similarly on a weekly basis (the sum 
of fifty- three cost groups divided by 53) will give 
a closer and better average for the year and at no 
more expense to keep. 



179 



XXI How to Figure Profit 

The average cost of goods, whether it be the 
result of a yearly, monthly or weekly basis of fig- 
uring, divided into the cost of sales (turnover) 
will give the per cent of turnover or the number 
of times or fraction of one time that the average 
stock investment has been turned. 

Discounting Bills 

Few merchants appreciate the enormous ad- 
vantage to their business of discounting their bills. 
One of the largest retail merchants in the country 
told the author once that if he did not make a cent 
net profit on his sales, his cash discounts earned 
would make him rich. If a merchant's sales for 
the year are as low even as, say, $12,000, the cost 
of the sales being, say, $9000, even 2% of this 
item will amount to $180, which is worth saving; 
and this is net, less the small item of interest on 
the money employed if it would otherwise draw 
interest or if borrowe3 at the bank. Deduct 3%, 
5%, 7% and see what the result will be. 

Which is the More Profitable 

And this brings to mind the question so fre- 
quently asked by merchants doing a cash and a 
credit business, Which is the more profitable, to 



180 



The Turning of Investment XXI 

borrow money at 6% and discount one's bills at 
2% or let them run full time (net) and pay from 
collections? If the term of credit to the merchant 
is 30 days and the discount period is 10 days (in 
each case from the date of the invoice), the 
money borrowed will be for 20 days (plus) ; and, 
if the interest charged be 6% on, say, $100 for 
20 days (plus), this would amount to $0.33 -|-, 
whereas 2% cash discount would amount to $2, 
a saving of $1.67 — . Even at 1%, it pays to bor- 
row the money to discount bills — a saving in this 
case of $0.67 — , while 3% to 7% means a hand- 
some income to the business man independent of 
net profit on sales. 

Figuring Ahead 

Important as it is to figure the turning of stock 
as you go along, as you sell, even more important 
is it that you figure ahead — in advance of sale. 

It is not enough that you look after the busi- 
ness of today, but that you look out for the busi- 
ness of tomorrow, that you ascertain in advance 
about what your daily, weekly and monthly turn- 
over, or, more properly, gross profit, as a result 
of turning your stock, will be, taking present fig- 
ures (cost and sale prices) as a basis. 



181 



XXI How to Figure Profit 

If the result is disappointing, it is better that 
you know it in advance than at the end; in other 
words, at a time when you can apply prevention 
rather than at a later period when it may be too 
late even to apply a cure. While the latter is good 
if applied in time, prevention is better. 

If you figure ahead, you will know about how 
much business you will do in a given time at your 
present rate of sales, and, if the result is not satis- 
factory, you will take steps to make it so; you will 
speed up; you will stop the leaks — you will do one 
hundred one things you would not do if you 
waited until the end of the year, as so many do. 

You may assume that your merchandise in- 
ventory or investment at the beginning of the 
week amounted to $10,000 and that your pur- 
chases during the week amount to $400. Now 
enter in your merchandise summary record not 
only the inventory and purchase cost, but also the 
selling or marked-up price of these two items and 
the gross profit (amount and per cent). 

Does the per cent of gross profit thus extended 
come up to the per cent you should make on sale, 
your expense to sale being known? Does it rep- 
resent the per cent of net profit to which you are 
entitled? But, granting that it does, the gross profit 
on your sales may not come up to this per cent. 



182 



The Turning of Investment XXI 

You may have mark-downs and discounts from 
the marked-up or selHng prices, which will reduce 
your per cent of gross profit on sales. Therefore 
you should establish a weekly basis — inventory 
plus purchases, less discounts, mark-downs, etc.; 
that is, you should not allow more than a week to 
pass without knowing what you are making on 
sales, and not more than a month to pass without 
taking a complete statement. Yet, think of the 
number of business men who, thru the keeping of 
a crude system of single entry bookkeeping, wait 
until the end of the year to get the result of their 
operations! They are practically in the dark for 
a year as to what their business is costing or pro- 
ducing them; and, even then, the result is not fair 
to the producing power of the business under 
proper figuring and account keeping. 

If a business is worth your time and your 
money, it is worth a system of figuring and cost 
keeping that will enable you to keep track of 
it. A business will prosper in proportion to the 
thought and effort put into it.: 

Credit Basis 

But Figure 5 and the statements made in rela- 
tion to the turning of investment imply a cash 



183 



XXI How to Figure Profit 

business. If credit is given, the turnover will be 
less frequent by the length of the credit given 
and the amount. 

For example, if you sell $100 worth of goods 
on one month's time, you will not have turned the 
cost of this sale until you get your money. From 
the standpoint of turnover, you have, as it were, 
simply parted with the possession of the merchan- 
dise and, weekly, monthly and yearly, in figuring 
turnover, you should deduct from the total cost of 
goods sold the cost of the unpaid sales on that 
date to get the correct turnover — unless, of course, 
you figure that the credit sales of one month will 
average with those of another month and, more 
particularly, that the accounts are good. 

Figure 6 will show the results and workings of 
a credit business as applied to turning merchan- 
dise investment. 

The effect of cre3it sales upon the running of 
a business will at once be seen. On the assump- 
tion that the credit sales are 50% of the total 
sales, until collections begin to come in, 50% of 
the "Prime Cost" (less the cash discount) and 
"Total" expenses must be drawn from surplus or 
borrowed at the bank to discount the bills an3 
meet the Carrying, Commercial and other ex- 
penses, while the Nominal Net Profit will be only 



184 



The Turning of Investment 



XXI 



PRIME 
COST 



CASH 



Gross Profit 



EXPENSES 



CARRYING 



COMMERCIAL 



CREDIT 



CASH 



CREDIT CASH 



TOTAL 



CREDIT CASH 



CREDIT 



. NOMINAL 
>JET PROFIT 



CASH 



CREDIT 



SALES 



CASH 



CREDIT 



Figure 6 
Sales Analysis Chart — Credit Business 
Note— Th.h Chart Illustrates a Credit Business 
and is Intended to Guide the Merchant in Issuing 
Checks for the Payment of Purchases. 



185 



XXI How to Figure Profit 

50% cash. And, after the collections begin to 
come in, there will be about the same per cent of 
credit and there will still be a shortage of cash. 

A merchant who proposes to sell on credit 
should deposit in the bank an amount equal to 
the average credit he proposes to give and a little 
more; then he can draw from this to discount his 
bills and meet his expenses, this fund or surplus 
to be replenished as collections come in. But 
this means capital out of proportion to sales. Of 
course, if his credit is good he can borrow the 
money; but, even so, he will have interest to pay 
and he must watch his collections closely. 

If he will use Figure 6 as a guide in issuing 
checks to pay his bills, the merchant will know 
what he is doing; he will know whether he is pay- 
ing from sales returns or from surplus capital or 

borrowed money. 

A Safe Guide 

To play safe in the building of a business, you 
should keep a systematic record of merchandise, 
sell at a reasonable net profit, push your sales, 
sell for cash or watch your collections closely, dis- 
count your bills from net profit or borrowed capi- 
tal and a safe business may reasonably be relied 
upon. 



186 



The Turning of Investment XXI 

If your capital is small, start in a small way 
and expand as your net profits warrant. Do not 
attempt to begin where the man of wealth left off; 
do not overstock. Every business must have a 
beginning and, if conducted on a right basis, it is 
sure to grow. 

How Often Should a Business Turn Merchandise Investment 

That depends (1) upon the business and (2) 
upon the management of the business and (3) 
upon the proximity of the business to the buying 
market. 

If merchandise investment is kept down to the 
actual demand, but not allowed to run short, and 
the sales are pushed, turnover will take care of 
itself. But merchandise can be kept at this point 
only by means of a record such as has been 
mentioned above. 

Increasing Sales From Net Profit 

No matter what be the merchandise investment, 
if it is in proportion to sales or probable sales, 
and the latter remain stationary — about the same 
day in and day out — the goods sold may be re- 
plenished without drawing on net profit if pur- 



187 



XXI How to Figure Profit 

chases are made frequently enough to keep up the 
stock and not in excess of the cost of sales. 

But every business man likes to see his business 
grow. He likes to see his sales increase from day 
to day. He likes to see ''season" goods on hand 
when the season opens. This means that he must 
apply his net profit, or a portion of it, or the 
equivalent in borrowed capital, to the increase of 
stock. 

The footing of the ''Nominal Net Profit" column 
(Figure 5) daily, weekly or monthly will show 
the business man how much he can increase his 
stock without drawing on surplus or borrowing 
money to discount his bills — selling on a cash 
basis being understood. For a credit basis, see 
Figure 6. 



188 



PART TWO 

Application of the Principles of 
Correct Figuring 

TO 

Your Business 



XXII 

General to Manufacturing and 
Merchandising 



Assuming that the general principles of How 
to Figure Profit have been so fully and clearly 
explained in preceding chapters as to be under- 
stood by every person who reads and studies this 
book, whether he be an employer or an employe, 
a manufacturer or a merchant, a teacher or a 
student, we shall proceed now with the steps 
necessary to putting these principles into practice 
in your business, whether it be manufacturing, 
trading or non-trading. 

Business Defined 

The term business as used and referred to in 
this book may be defined as an undertaking or 
activity in which capital is invested with the im- 
plied understanding that it shall yield to the in- 
vestor a larger income or net profit than it would 
if placed on secured loan and at the same time 
provide him (if he be the controlling factor) with 



191 



XXII How to Figure Profit 

a permanent employment at as large a salary as 
he could earn elsewhere in the same line. 

The ownership of the capital investment and the 
control of the operations incident thereto may be 
vested in one or in more than one person, depend- 
ing upon the form of the ownership, as Individ- 
ual, Partnership or Corporate. 

The Principles Apply to All Businesses 

In preceding chapters, reference has been made 
principally to manufacturing, trading and non- 
trading businesses, with special emphasis upon 
the first two, they being in the majority, yet the 
principles and suggestions apply as well to extrac- 
tive businesses, as agricultural, mining and other 
businesses of a similar nature. They apply to 
every business conducted for profit or mutual 
benefit. 

Study Other Businesses As Well As Yours 

Comparison is Beneficial — In a measure, it is by 
comparison with other businesses that one studies 
and finds the strong and the weak points in his 
business. It is a mistaken idea that the condi- 
tions in no two businesses are alike. While it 



192 



General to Manufacturing and Merchandising XXII 

may be said of course that, in certain respects, the 
conditions in no two businesses are quite ahke, yet 
it may also be said that, in certain other respects, 
the conditions in all businesses are alike. From 
the viewpoint of system, of correct figuring, of 
cost keeping, there is certainly no difference in 
businesses; that is, the same necessity for these 
elements exists in all businesses. 

System the Important Factor — In other words, the 
elements which make for success or failure in one 
business will usually make for success or failure 
in all businesses of the same kind or class. Chief 
among those which make for success is system, 
which implies and comprehends, among other 
things, the keeping track of the operations of a 
business in a way so simple as to involve the least 
outlay of time and money, yet so complete in detail 
as to keep before the business man daily, weekly 
and monthly such facts and figures as will enable 
him to get out of his investment the highest per 
cent of net profit that the business is capable of 
producing. 

It is Good Business — It is good business policy, 
therefore, to study other businesses than one's own ; 
or, putting it in another way, to study other busi- 
nesses in relation to one's own business. The suc- 
cessful attorney in preparing a case for court will 



193 



XXII How to Figure Profit 

make as careful and thorough a study of the other 
side of the case as he will of his. He will not 
allow himself to be taken by surprise when the 
case comes up in court. 

The business man will find it to his advantage 
to proceed similarly. It will enable him to dis- 
tinguish between essentials and non-essentials; 
between strength and weakness; between elements 
which make for bigness — for growth and expan- 
sion — and those which make for a mere living. 

The Difference is Marked — In studying other 
businesses in relation to or with a view of getting 
a closer line on your business, however, bear in 
mind that there is a marked difference between 
businesses which are known as manufacturing and 
those which are known as trading, as has been 
explained in a preceding chapter. These two 
classes of businesses represent two quite distinct 
lines of operation anS should be studied from dif- 
ferent viewpoints, although, in certain respects, 
they are not dissimilar. 

A manufacturing business may be said to be 
the reverse or opposite of a trading business in 
that the working force and volume of clerical de- 
tail enter into or are connected with the cost rather 
than with the sale of the article, as in a trading 
business. 



194 



General to Mamifacturing and Merchandising XXII 

The line between these two classes of businesses 
may be drawn at the point where the finished 
article is dehvered to the sales room. It is at this 
point the volume of detail in a manufacturing 
business ends and in a trading business begins. 

Certain Businesses Not Easily Identified 

While the identification of most businesses may- 
be comparatively easy, yet there are some which 
it may be difficult for persons inexperienced in 
accountancy to identify or to classify. 

If the business in which you are engaged in- 
volves the changing in any way (except the break- 
ing of the original package) of the article or 
articles which you handle before delivery to the 
buyer, you may be reasonably sure that it belongs 
to the manufacturing division and your expenses 
should be grouped accordingly. 

Chief among businesses belonging to the manu- 
facturing division not easily identified are repair 
shops of all kinds, tailor shops, blacksmith shops, 
printing plants, etc. 

On the other hand, every business which sells the 
identical thing or things which it buys, in the 
original or in broken lot, is a trading business. 

It is true that some businesses combine manu- 



195 



XXII How to Figure Profit 

facturing and trading, making one or the other 
the major, in which case a combination record 
should be kept of the two Hnes. 

The Charting of Your Expenses 

Regardless of the system of bookkeeping you 
keep or whether you keep a set of books accord- 
ing to any system, it is important that you make 
a complete chart of your expenses, charges an'd 
deductions as a basis for correct figuring — for 
establishing a selling price that will yield you a 
satisfactory net profit. 

It Has a Twofold Purpose — A bookkeeping sys- 
tem is not necessary to the charting of your ex- 
penses, however important it may be to the success 
of your business; but the charting of your ex- 
penses is necessary to a bookkeeping system as 
well as to the establishing of a correct selling 
price. 

Use the Outline as a Basis — From the standpoint 
of an accounting system or charting expenses, 
your business differs from another business of 
the same kind or class only in detail or perhaps 
magnitude. It belongs to one of three or more 
divisions, principally, manufacturing, trading or 
non-trading, and hence you need simply to know 



196 



General to Manufacturing and Merchandising XXII 

to what one of these it belongs in order to begin 
to figure. When this point is settled in your mind, 
refer to the outline in one of the three chapters 
following and proceed to make up your chart. 
No item of expense entering into the conduct of 
your business, whether ledger charge or merchan- 
dise or statement deduction, should be omitted 
from this chart. The outline is of course merely 
suggestive. It may be modified in any way you 
see fit. For example, two or more account titles 
may be combined or certain ones struck out and 
others inserted or substituted. 

While certain items of expense are common to 
all businesses, it is not possible to make up or 
even to suggest here a chart of expenses that will 
not need to be modified to meet the needs of each 
business of a kind or class. Certain items of ex- 
pense enter into one manufacturing or trading 
business which do not enter into certain other 
manufacturing or trading businesses. 

For example, in the grocery business a record 
(not an account) will need to be kept of, and a 
deduction from merchandise later made for, all 
stock spoiled, as butter, eggs, milk, fruit, vege- 
tables, etc., under some appropriate title or head, 
as Spoilage. And this record should be made 
with the same promptness as would a record of a 



197 



XXII How to Figure Profit 

sale on account. Do not put it off until the end 
of the day or the end of the week or the end of 
the month and then estimate the value of the 
charge or deduction. 

In certain other businesses a similar record 
will need to be kept of Breakage, Shrinkage, etc. 

The important thing is to see that every item 
of expense incurred in the running of your busi- 
ness is included under some appropriate ledger 
expense title, unless otherwise taken care of, as 
are the items above mentioned. But even these 
items must be taken into consideration in estab- 
lishing the selling price; that is, the latter must 
be high enough to provide for these eliminations 

without cutting into the net profit to which you 
are entitled. 

The several expense titles which go to make 
up the charts in the chapters following represent 
the expense accounts which would be opened in 
the expense section of the ledger in a properly 
systematized business and the merchandise and 
statement deductions. The charts are reproduc- 
tions of expense charts of three of the many busi- 
nesses which the author has systematized. 

Of equal importance with the charting of your 
expense titles is the charting of your expense 
items under the several titles or chart heads for 



198 



General to Manufacturing and Merchandising XXII 

a given period of time, as a month or a year, in 
order to determine your expense to sale in your 
weekly or monthly operations. 

Value of the Chart Analysis — The value of mak- 
ing a complete analysis of your expenses according 
to one of the three sets of charts referred to over 
condensing them under one or a few account 
heads, as so many do, lies in the fact that it will 
enable you to watch the leaks more closely, and 
that it will lessen the liability of your overlooking 
items of expense which might otherwise escape 
your notice, and that it will enable you to keep a 
simple though correct cost system of bookkeeping 
if you wish so to do. 

It takes no more time after the chart is once 
made to keep track of your expenses in this way 
and it insures accuracy; that is, from the stand- 
point of a bookkeeping system, it takes no more 
time to post to one account than to another if 
your ledger is properly arranged and classified, 
while, from the standpoint of figuring profit, it 
is essential. 

If you have not been keeping a cost or even a 
double entry system of bookkeeping, the charting 
of your expenses in this way will involve what 
may seem to you considerable work, but it will be 
as nothing compared to the results. Indeed, it 



199 



XXII How to Figure Profit 

will be a simple matter when you once understand 
the chart classification and how to treat the sev- 
eral groups of expense, charge and deduction 
which go to make up the chart. 



200 



XXIII 

A Working Outline for a Manufacturing 

Business 



The Same General Principles Govern 

If you are engaged in the business of manufac- 
turing, the same conditions confront you as con- 
front everyone else similarly engaged, and this is 
true regardless of the line or lines manufactured. 
Manufacturing businesses differ one from another 
only in management, magnitude and detail. 

The same general principles govern in all. The 
same divisions and subdivisions of cost will be 
found in all, although the elements which enter 
into these divisions and subdivisions may differ in 
kind and in proportion. 

The same principles of cost keeping apply to all 
manufacturing businesses, whether the factory be 
on a Continuous Process or a Production Order 
basis, but of course a distinction must be made 
between these two in the keeping of the cost 
records. 

The important thing for you to keep in mind 
is that you should know to the closest possible 



201 



XXIII How to Figure Profit 

fraction what the product you manufacture costs 
you. You should so keep your cost records as to 
know the cost per unit of raw material, productive 
labor and manufacturing expense. You should 
also know the ratio of each of these to manufac- 
turing cost, and the ratio of manufacturing cost 
to sales. 

You can easily figure the cost of raw material 
and productive labor per unit if you use a simple 
system of requisitions and time slips, supplemented 
by suitable cost records; and the manufacturing 
expense may be determined by following the chart 
outline, as may also the commercial and direct 
expenses. 

Cost Basis 

As stated in a previous chapter, the basis of 
cost is not the same in a manufacturing business 
as in a trading business, nor is it arrived at in 
the same way. 

In a trading business, prime or delivered cost is 
the basis and this is established, or practically so, 
for the merchant. It remains for him simply to 
determine the ratio of this cost to sale in order 
to fix a selling price that will yield him the net 
profit he desires to make. 



202 



Manufacturing Business Working Outline XXIII 

In a manufacturing business, however, the 
basis of figuring is manufacturing cost and this 
must be estabHshed thru a system of cost records 
before the ratio to sale can be determined. 

A Simple System of Cost Keeping 

The first thing to be considered, therefore, is 
the putting into the manufacturing end of your 
business a simple system of cost keeping that will 
give you on every article you manufacture and on 
your monthly and yearly output a correct cost 
basis for further figuring. The trouble with too 
many manufacturing plants is that they arrive at 
the cost basis thru guess or thru guess plus a 
crude system of cost records. 

Exact cost figures in a manufacturing business 
are possible, but only thru correct figuring. You 
cannot keep your books by single entry or by mere 
double entry and hope to arrive at a correct basis. 
You may be too high or too low and, in either 
case, defeat the ends for which your business is 
being operated. 

Information Your System of Cost Keeping Should Give You 

The information of prime importance to you and 
which you should get from your cost records is : 



203 



XXIII How to Figure Profit 

1. The cost of raw material, the cost of pro- 
ductive labor and the manufacturing expense, 
these three elements constituting manufacturing 
cost, which is your basis for figuring profit. 

2. The ratio each of raw material, productive 
labor and manufacturing expense to manufactur- 
ing cost. 

3. The ratio each of manufacturing cost, com- 
mercial and direct expenses to sales. 

Are these ratios too high? Is any one of them 
too high? Can the expense be cut down without 
reducing the output? These and similar questions 
should suggest themselves to you. 

Prepare statements of your business similar to 
the following, if your bookkeeping system will 
enable you to do so, and study the results. 



204: 



Manufacturing Business Working Outline XXIII 



Statement I 



Cost Analysis of a Year's Business 



1. Ledger Charges: 

Item 

Raw Material 
Productive Labor 

Prime Cost . 
Manufacturing Expenses 

Manufacturing Cost 
Commercial Expenses 

Subtotal Cost 
Direct Charges 

Total Cost . 
Sales for Year 



Amount Reference 

$47,972.20 Material Requisitions 
13,110.10 Time Records 



$61,082.30 
8,953.17 Chapter XXIII 



$70,035.47 
21,846.40 Chapter XXIII 



$91,881.87 

896.18 Chapter XXIII 



$92,778.05 

102,642.62 Sales Record 



Nominal Net Profit . $ 9,864.57 

2. Statement Deduction: 

Interest on Investment 

($40,000 — 6%) . . . $ 2,400.00 Current Rate 

Net Profit .... $ 7,464.57 



205 



XXIII How to Figure Profit 



Statement II 



Profit Analysis of a Year's Business 

1. Viewpoint of the Business: 

Sales $102,642.62 

Less Manufacturing Cost .... 70,035.47 

Gross Profit I $ 32,607.15 

Less Commercial Expenses . . . 21,846.40 

Gross Profit II $ 10,760.75 

Add Other Earnings 1,439.16 

Gross Profit III . ^ ..... $ 12,199.91 

Less Direct Charges 896.18 

Nominal Net Profit $ 11,303.73 

2. Viewpoint of the Investor: 

Less interest on Investment ... $ 2,400.00 

Net Profit $ 8,903.73 



The item of Net Profit represents the value of 
this form of investment over that of placing your 
money on secured loan. 



206 



Manufacturing Business Working Outline XXIII 



Statement III 



Percentage Analysis of a Year's Business 

Assuming, as the two preceding statements 
show, that your sales for the past physical year 
were $102,642.62, the figures taken from your 
books may be tabulated as follows: 

Ratio to Manufacturing Cost 

Raw Material .... $47,972.20 — 68.4+% 
Productive Labor .... 13,110.10 — 18.8+% 
Manufacturing Expenses . . 8,953.17 — 12.8—% 



Total (Manufacturing Cost) $70,035.47 — 100 % 

The per cent to cost is found by dividing the 
amount of each cost group by the total manufac- 
turing cost. 

Ratio to Sales 



Manufacturing Cost . 

1. Commercial Expenses 

2. Direct Expenses or Charges 

3. Interest on Investment . 

4. Net Profit .... 



$70,035.47 — 68.23+% 

21,846.40 — 21.28+% 

896.18 — .87+% 

2,400.00 — 2.32+% 

7,464.57 — 7.30-% 



Total (Sales Price) . . $102,642.62 — 100 % 



2or 



XXIII How to Figure Profit 

The per cent to sale is found by dividing the 
amount of each cost group by the total sales. 

It will be noted that items 1 and 2 represent 
the per cent of gross profit which must be made 
on sale ($102,642.62) to come out even, from the 
viewpoint of the business, while, from that of the 
one or ones investing in the business, items 3 and 
4 should be made in addition. Item 3 represents 
the investors as coming out even, while item 4 
represents the margin (that or more) to which 
those investing their money in the business are 
entitled for the risk taken and the responsibility 
assumed. 

Items 1 to 4, inclusive, under "Ratio to Sales" 
represent gross profit — sale over cost. If 7 3/10% 
is the net profit desired (add the per cent the 
article will bring), the equivalent of the sum of 
the four per cents should be added to manufac- 
turing cost to produce the price at which the 
article manufactured should be sold. That is, 
the sum of the four per cents is 31.77% — call 
it 32%. The equivalent of this is 32/68% or 
8/17%. This added to manufacturing cost will 
give the price at which the product should be 
sold. Of course, as in a mercantile business, 
the selling qualities of the article must be con- 
sidered. 



208 



Manufacturing Business Working Outline XXIII 

Expense Charts 

The following outlines will be of value in mak- 
ing up a set of Expense Charts. 

In some businesses it may be possible to use 
these charts without modification, while in others 
it may be necessary, as previously stated, to add 
to, take from or change to meet the needs of the 
particular business. 

Manufacturing 

Demurrage and Switching — In 

Depreciation of Plant 

Electric Power 

Experimental 

Factory Clerical Help 

Freight, Express and Cartage — In 

Heat and Steam Power 

Idle Time 

Insurance — Fire 

Insurance — Liability 

Insurance — Boiler 

Interplant Trucking 

Janitor Service and Watchman 

Janitor Supplies 

Lavatory and Toilet Supplies 

Light — Electric 

Light — Gas 



309 



XXIII How to Figure Profit 

Miscellaneous Manufacturing Expense 

Purchasing Expense 

Rents — Manufacturing 

Repairs to Real Property 

Repairs to Buildings and Building Fixtures 

Repairs to Electric Fixtures 

Repairs to Machinery and Tools 

Repairs to Factory Furniture and Equipment 

Superintendent and Foremen 

Taxes — Special 

Taxes — City, County, State and School 

Water. 

Commercial 

Accountancy Expense 
Advertising Contracts 
Advertising Matter 
Bad Accounts 

Books, Stationery and Expense 
Cash Discount — Allowed 
Charities and Donations 
Collection and Exchange 
Commissions Allowed 
Crating and Shipping 
Demurrage and Switching — Out 
Depreciation of Office Equipment 
Directors' Fees and Expenses 
Expenses of Salesmen 



210 



Manufacturing Business Working Outline XXIII 

Expenses of Officers 

Freight, Express and Cartage — Out 

Legal Expense 

Mercantile Subscriptions 

Miscellaneous Commercial Expense 

Postage 

Repairs to Finished Stock 

Repairs to Office Furniture and Equipment 

Replacements 

Salaries of Officers 

Salaries of Office Employes 

Salaries of Salesmen 

Taxes — Revenue 

Taxes — Corporation 

Telephone Rental 

Telephone and Telegraph Tolls — Out 

Direct 
Interest Allowed 
(Perhaps Others) 

Statistical — For the Statement Only 
Interest on Investment 

Cost Grouping 

The Manufacturing Expenses added to Prime 
Cost (Raw Material and Productive Labor) will 
give Manufacturing Cost. 



211 



XXIII How to Figure Profit 

The Commercial Expenses may be in two divis- 
ions if desired — Administrative and Selling. 

These added to Manufacturing Cost will give 
Subtotal Cost. 

The Direct Expenses or Charges added to Sub- 
total Cost will give Total Cost. 

An additional item of deduction from Earnings, 
in making up the Statement, although it does not 
go into the ledger as a charge, is Interest on the 
Investment. This Item should be taken into con- 
sideration in making the Statement deductions. 
It follows the Total Cost deduction from Earn- 
ings, the result being the Net Gain or velvet, so 
to speak. 

Reference to Figure 1, Chapter IV, will show 
the respective positions of these groups of ex- 
penses in the complete chart of a manufacturing 
business. 



212 



XXIV 

A Working Outline for a Trading 
Business 



If you are engaged in the business o£ merchan- 
dising, or in any line of trading, your basis of 
cost for the purpose of marking the seUing price 
will be the Invoice Price, the price you pay for 
the article or articles at the place of purchase; 
and this is true whether you treat Carrying Ex- 
pense as a ledger charge or as a merchandise 
deduction, or whether you take the invoice price 
or the delivered cost as the basis. 

Expense Charts 

The following charts may be readily adapted 
to the needs of your business. Of course, you 
may wish to strike out certain account titles or 
to add others or to combine two or more in one, 
as previously explained. 

Carrying Expense: 

Freight Cartage 

Express Parcel Post 



213 



XXIV How to Figure Profit 

While these items may be carried as accounts in 
the ledger, they are more properly chargeable to 
merchandise cost weekly or monthly, since they 
were incurred on the cost. In either case they 
may be grouped under one head or title, as Carry- 
ing Expense, or Transportation — In, or Freight, 
Express, Cartage and Parcel Post — In (unless 
added to the invoice price to get delivered cost). 

Merchandise Deductions : 

Discounts to Employes Mark-Outs: 

Discounts — Miscellaneous Breakage 

Mark-Downs Spoilage, Etc. 

The above items do not go into the ledger. 
They are deducted from the selling price in the 
Merchandise Summary weekly and have the 
effect of reducing the gross profit on sales as 
does the Carrying Expense. 

Operating Expense 

Advertising Contracts (Newspaper) 

Advertising — Special 

Advertising Matter (Printed and Plate) 

Alterations and Repairs 

Association and Convention Expenses 

Bad Accounts 

Books, Stationery and Expense 

Charities and Donations 



214 



Working Outline for a Trading Business XXIV 

Collection and Legal Expense 

Delivery Expense 

Depreciation of Store Equipment 

Heat 

Insurance — Fire 

Insurance — Liability 

Janitor and Lavatory Expense 

Light 

Miscellaneous Operating Expense 

Nightwatchman and Street Service 

Postage 

Purchasing Expense 

Repairs to Store Equipment 

Replacements 

Salaries of Employers 

Salaries of Employes 

Taxes — City, County, School and State 

Direct Expense: 

Interest Allowed 
(Perhaps Others) 

Statistical — For the Statement Only 
Interest on Investment 

Cost Grouping 

The Carrying Expenses added to Prime Cost 
v^ill give Merchandise or Delivered Cost. 



215 



XXiy How to Figure Profit 

The Operating Expenses added to Delivered 
Cost will give Operating or Subtotal Cost. 

The Direct Charges added to Subtotal Cost will 
give Total Cost. This subtracted from the sum 
of the Sales and Other Earnings will give Nomi- 
nal Net Profit. 

As in a manufacturing business, a Statement 
deduction should be made for Interest on the In- 
vestment, and, since this is the last deduction to 
be made from earnings, the remainder will be Net. 

As a guide in establishing the selling price, the 
Carrying Expense and Merchandise Deductions 
and the Operating and Direct expenses should be 
added to get the total expense to sale from the 
viewpoint of the business; and, from the view- 
point of the investor. Interest on the Investment 
should also be added. 

Therefore, to determine the per cent of Gross 
Profit your mark-up should represent, add these 
expense and interest groups for a given period 
and divide the result by the sales for the same 
period and, to this result, add the per cent of Net 
Profit you desire to make and you will have the 
average per cent of Gross Profit which you should 
make on the marked-up price. 

But this, bear in mind, is for the purpose of 
establishing the selling price of the stock in pur- 



216 



Working Outline for a Trading Business XXIV 

chasing or as it goes into the Stock Record, inso- 
far as it may serve as a guide. The selHng price 
is of course fixed at what the article will bring, but 
this should be determined at the time of buying, 
and it must represent a satisfactory gross profit. 

When the footings from this book are taken to 
the Merchandise Summary, the per cent of ex- 
pense to sale will be reduced by the per cent of 
Carrying Expense and Merchandise Deductions 
to sale, since gross profit will be reduced by the 
amount of these items. 

For example, assuming that the expense to sale, 
which should be known at the time of buying or 
marking up, is 24%, which includes Carrying Ex- 
pense (say, 1%) and Merchandise Deductions 
(say 2%), when the purchases, plus the Carrying 
Expense, minus the Merchandise Deductions, are 
brought to the Basis division of the Merchandise 
Summary, the expense to sale will be only 21%, 
3% less than at the time of marking up, the two 
items of expense which this 3% represents having 
been deducted from gross profit in the operations 
intervening. 

In other words, from the viewpoint of the 
Merchandise Summary (Basis division), the per 
cent of expense to sale will exclude the Carrying 
Expense and Merchandise Deductions. 



217 



XXIV How to Figure Profit 

Of course, to simply guide you in establishing 
the selling price, it is not necessary to divide the 
expenses as above, but it is better in that it avoids 
the possibility of overlooking any items of outlay 
and it may lead you to see the value of keeping 
a suitable cost system. 

In a small business, or in any business for that 
matter, Carrying Expense may constitute one ac- 
count. 

The freight, express and cartage bills should be 
collected and entered daily if possible, but never 
allowed to run over the month. 

The parcel post items may be gotten from the 
invoices as received and the telephone tolls from 
the telephone bills monthly. 

A bill or statement should be made of the trav- 
eling and hotel expenses upon returning from a 
trip and the charge made from this. 

Treatment o£ Carrying Expense 

Carrying Expense may be made either an in- 
direct or a direct charge to merchandise. 

If it is made an indirect charge, which is not 
advisable, you will open an account with it in the 
ledger and depreciate it monthly in proportion to 
sales, carrying the inventory or unsold value as 
you do the inventory of unsolH stock. 



218 



Working Outline for a Trading Business XXIV 

If it is made a 3irect charge, you may close it 
weekly or at once to merchandise; but pursue one 
method or the other — do not alternate. 

Making the Purchase Price the Basis — If you close 
it weekly, a record separate from that with mer- 
chandise must be kept with it (in the Stock Rec- 
ord or elsewhere) until the close of the week, 
when it will be added to the week's purchases in 
the Merchandise Summary (Figure 7) and posted 
to the Merchandise account in the Ledger if such 
an account is kept. The posting, however, need 
not be made until the end of the month, when 
other column totals are posted. 

Making Delivered Cost the Basis — If you close it 
at once, you will add it to the invoice price on the 
face of the invoice, or you may enter it in the 
Stock Record, as the expense is incurred, in the 
cost, or invoice price, column or in a column next 
to the invoice price. If the latter, at the close of 
the week these two columns should be added and 
the sum of the two footings brought to the Mer- 
chandise Summary, Cost column. This item will 
be the Merchandise or Delivered Cost and consti- 
tute the basis for further figuring. It is under- 
stood of course that the selling price is to be 
brought forward also to the Sales column. 

If a ledger account is kept with Merchandise 



219 



XXiy How to Figure Profit 

Purchases, the same cost total (Price and Ex- 
pense) should be posted to Merchandise Pur- 
chases, or this may be done at the end of the 
month. 

Treatment of Merchandise Deductions 

In preceding chapters, and in this chapter also, 
special emphasis has been placed on the import- 
ance of keeping track of every item of expense 
incurred in the conduct of your business. But a 
distinction should and must be made between 
items which are expense in the sense of ledger 
charge and those which are expense in the sense 
of merchandise deduction. 

For example, take two items which we may 
call, respectively, fuel and spoilage. Both of these 
items represent an expense outlay or a charge 
against earnings. The first, for a given period, 
amounts to, say, $10 and the second for the same 
period amounts to, say, $4. The fuel was pur- 
chased with full knowledge of its becoming a 
ledger charge to expense. But the goods which 
were spoiled in stock and listed under the title 
Spoilage were purchased to sell again, to pro- 
duce a revenue, and charged to stock, and they 
should therefore be deducted from stock (marked- 



220 



Working Outline for a Trading Business XXIV 

up price) rather than ma3e a ledger charge to 
expense. Yet such items as this must be taken 
into consideration in determining the expense to 
sale at the time of fixing the selHng price, since 
they represent a reduction of profit. That is, the 
gross profit which the marked-up price represents 
must be large enough to cover such items as this 
as well as the ledger expense charges, and this is 
true whether the invoice price or delivered cost 
be taken as the basis of cost. 

The items of expense which are properly a 
merchandise deduction rather than a ledger charge 
are discounts, mark-downs and mark-outs — spoil- 
age, breakage, etc. These items are deducted 
from the selling price, which reduces the profit 
and has the same effect as a ledger charge against 
earnings, except that the latter would be made 
monthly, while the former is made weekly, which 
enables you to keep a better record of stock. 

Stock which is given away should be treated as 
a sale and included in sales and charged to some 
appropriate expense account at retail price, as 
Charities and Donations. 



Operating Expenses 

These are clearly a le3ger charge or the equiv- 



221 



XXIV How to Figure Profit 

alent and include the Purchasing, Administrative 
and Selling expenses incurred in the regular course 
of your business operations and should be closed 
to Loss and Gain monthly, that is, if you decide 
to keep a cost system and take off a complete 
statement of each month's operations. This, how- 
ever, is not necessary to the keeping track of mer- 
chandise; it is simply an added advantage to you. 

Direct Expenses 

As previously explaine3, these are properly a 
direct charge to Loss and Gain. In most busi- 
nesses only one item of expense will come under 
this head, namely. Interest Allowed. 

The Selling ot Marked-Up Price 

As stated in Chapter XIII, the selling, or 
marked-up, price, whatever be the amount in dol- 
lars and cents, is always 100%. This per cent is 
intended to cover the invoice price and all items 
of expense, stock and statement deductions and 
the desired net profit — and it will if it is the 
result of correct figuring and the stock is sold 
at the price marked. 

This per cent (100) is divided into two parts, 



222 



Working Outline for a Trading Business XXIV 

one representing the invoice price and the other 
the gross profit which the selHng price over the 
invoice price indicates should be made, but not 
necessarily the per cent which will be made, as 
will later be seen. 

The ratio in per cent to selling price is deter- 
mined by dividing the invoice price by the selling 
or marked-up price, the remainder being the per 
cent of gross profit which the marked-up price 
indicates should be made. 

What The Gross Profit is Expected 
TO Cover 

This per cent of gross profit is expected to 
cover the following items: 

1. Carrying Expense 

2. Merchandise Deductions 

3. Operating Expense 

4. Direct Expense 

5. Interest on Investment 

6. Net Profit. 

That is, the selling price must be placed high 
enough to produce a gross profit that will cover 
items 1 to 4, inclusive, if the business is to come 
out even; whereas, if the investor is to be com- 
pensated for his investment and for the risk he 
is taking, it should cover items 5 and 6 as well. 



223 



XXIV How to Figure Profit 

Therefore, in buying and in marking up it is im- 
portant to know, in per cent as well as in amount, 
the items of expense which the selling price is 
expected to cover. 

The amount and the ratio to sale of only one 
of the above items, however, is definitely known 
in advance of sale. This item is No. 5 — Inter- 
est on the Investment. The ratio to sale of items 
1 to 4, inclusive, can be determined only by pre- 
vious experience and your records for any reason- 
able period back, as a year or a month or a week; 
or you may figure ahead — anticipate your sales 
and expenses. The figures arrived at in this way, 
however, will be only approximate; but they will 
be close enough for the purpose of marking up at 
least, since only a week will elapse until you know 
to a reasonable certainty your expense to sale — 
for the week. This is quite 'different from waiting 
a year for the same information, as most business 
men do. 

Getting Down to Actual Figures 

To get down to actual figures, we will assume 
that, at the time of marking the stock for sale, 
the actual and estimated ratios to the marked-up 
or selling price of the invoice and the items of ex- 
pense and deduction previously mentioned are as 
follows : 



224 



Working Outline for a Trading Business XXIV 



a. 


Invoice Price 


70.00% 


1. 


Carrying Expense . . . 


1.00% 


2. 


Merchandise Deductions 


. 2.00% 


3. 


Operating Expense . . 


20.00% 


4. 


Direct Expense . . . 


.50% 


5. 


Interest on Investment . 


.50% 


6. 


Net Profit (desired) . . 
Total 


. 6.00% 




. 100.00% 



While the above figures are based only in part 
on fact, they play an important part in marking 
up. And, while the marked-up price is not the 
direct result of these figures, but rather that of 
the selling qualities of the article, yet the one 
marking is influenced by them nevertheless. 

It will be noted that 70% of the marked-up 
price must be applied to the payment of the in- 
voice, and that 23%% is to be applied to the 
payment of items 1 to 4, inclusive, leaving a Nom- 
inal Net Profit of 61/2%. 

But these figures represent simply what the 
average marking should show. Not all articles 
marked will show a gross profit of 30% — some 
more, some less, since the person marking must 
be governed quite as much or more by the selling 
qualities of the article which he marks as by the 
per cent of gross profit which the marked-up price 



225 



XXIV How to Figure Profit 

should represent. And he must be reasonably 
sure not only of the price at which it will sell, 
but that it will sell readily at that price. He may 
err in judgment, for, after all, marking up is in 
part a matter of judgment, except in the case of 
certain staples whose prices are regulated by com- 
petition or by law. 

Movement of The Stock The Real Test 

The accuracy of the judgment used in marking 
can be determined only by watching the movement 
of the stock. This is the real test of the selling 
qualities of any article of merchandise and of the 
judgment of the one who marks up. If the move- 
ment of the stock is abnormally slow, the price 
may have to be changed. This change must be 
kept track of and brought into the weekly sum- 
mary as a decrease of profit. 

The Week's Average 

Whether the Carrying Expense be added to 
merchandise weekly or at once, the footings of 
the Stock Record, cost and selling prices, are 
brought to the Merchandise Summary (Figure 7) 
as of the close of the week and the per cent of 
gross profit represented by these footings carried 
out. 

This per cent compared with that which may 



226 



Working Outline for a Trading Business XXIV 

be said to have influenced the merchant in buying, 
or in marking the selling prices as he did, will 
show how closely he kept to the basis of 30% in 
using his judgment as to the selling qualities of 
the week's purchases, the prices so marked rep- 
resenting various per cents of gross profit. 

But, even at this point, the per cent shown by 
the week's footings should be regarded merely as 
a test of the judgment of the one who did the 
marking or pricing. It cannot be regarded as 
representing the exact results of the week's opera- 
tions. This per cent will be shown later. 
The Estimated and The Actual 
Profits 

The Carrying Expense for the week should 
now be brought to the Merchandise Summary 
(Figure 7), if it was not added at once to the 
invoice price, and, following this, the Discounts, 
Mark-Downs, Mark-Outs, and Mark-Ups, if any. 

The effect of the Carrying Expense, Discounts, 
Mark-Downs and Mark-Outs is to reduce the 
gross profit which the marked-up price indicated 
should be made on sale. But this, it will be re- 
membered, was taken into consideration at the 
time of marking up, 1% having been included to 
meet the Carrying Expense and 2% to meet the 
MerchanSise Deductions. 



227 



XXIV How to Figure Profit 

The estimated gross profit of 30% will now 
be reduced by the sum of these two per cents, the 
difference (27%) being the per cent which the 
week's sales should show, unless increased by 
Mark-ups, if any. And this, by the way, is the 
effect of Mark-Ups, namely, to increase the sell- 
ing price and the per cent of gross profit on sale. 
Goods should be marked up as the price at which 
they can be duplicated goes up. This is fair, 
since they must be marked down as the price at 
which they can be duplicated goes down. 

Correct Stockkeeping Necessary to Correct Figuring 

The study of this book will be of little value to 
you unless you put the principles of correct figur- 
ing into practice in your daily operations — unless 
you inject system into the merchandise or trading 
end of your business at least. 

As a basis for correct stockkeeping, it is neces- 
sary that you know the cost and selling prices of 
every item of merchandise you have in your store. 

Inventory Your Stock 

The first thing to do therefore is to inventory 
your stock at the cost and selling prices. In future 
inventories you will not take cost into considera- 



228 



Working Outline for a Trading Business XXIV 

tion, but you should do so now to get a correct 

basis for the selling price. 

The difference between the cost and selling 
prices of the inventory so taken will be the gross 
profit you should make in selling this stock. Di- 
vide this by the selling price and it will give you 
the per cent you should make. Is it satisfactory? 
If not, go thru your stock and see what is wrong. 

The inventory which you take may be classified 
by departments or not, as you prefer, but it should 
be accurate to an item in quantity, cost and selling 
prices. 

Merchandise Books 

Only a few books are necessary to the keeping 
of a correct record of merchandise, which is the 
important end of your business. These are: 

1. Stock Record, It is not necessary that an 
expensive book be used for this purpose. Any 
cheap two or three column book will do. This 
may be supplemented by a card system if a quan- 
tity record is to be kept, and it should. 

The Stock Record may or may not be classified, 
depending upon the line you carry and the magni- 
tude of your business. The opportunity exists for 
minute classification. 

At the end of each week, the columns of this 
book should be footed and the footings brought 



229 



XXIV How to Figure Profit 

to the Merchandise Summary — Figure 7. This 
will clear the Stock Record for the next week's 
purchases. 

2. Carrying Expense. The bookkeeping system 
you keep should take care of this thru the use of 
special columns. If you do not keep a double entry 
or a cost system, however, a record of the items 
coming under this head may be kept in a cheap 
book or in a section or in a column of the Stock 
Record (if not added to the invoice price at once) 
and the footing or footings brought to the Mer- 
chandise Summary weekly. 

3. Merchandise Deductions, A book similar to 
the Stock Record may be used for Discounts, 
Mark-Downs, Mark-Outs and Mark-Ups — a sec- 
tion for each — and the footings brought to the 
Merchandise Summary Weekly. 

4. Merchandise Summary. This should be a 
specially ruled book, corresponding to Figure 7, 
which see. 

The first division (i) of this book, as will be 
noted, is for the Date — the last day of the week, 
except when the last day of the month comes 
earlier in the week, in which case that date, since 
the monthly results should be shown as well as 
the weekly results. 

The second division (2) is for the Purchases for 



230 



Working Outline for a Trading Business XXIV 

the week, as shown by the Stock Record, cost and 
selling prices, and the per cent of gross profit 
which the selling or marked-up price represents. 
This will be the average of the different articles 
of stock marked up during the week and will test 
the judgment of the one who did the marking or 
established the prices. 

The third division (3) is for the Carrying Ex- 
pense for the week. This item will be added to 
the Cost footing of Merchandise Purchases in 
bringing the latter forward to the Basis division 
(7), since it goes to increase the cost of merchan- 
dise. If Carrying Expense is added to the invoice 
price at once, this column will not be necessary. 

The fourth division (4) is for the Discounts 
which are allowed employes and others during the 
week. This item is subtracted from the Sale foot- 
ing of Merchandise Purchases in bringing the 
latter forward to the Basis division (7), since it 
represents a reduction of the selling price. 

The fifth division (5) is for the Mark-Downs 
and Mark-Outs, which are treated the same as 
discounts, since they represent, respectively, par- 
tial and total reduction of selling price. 

The sixth division (6) is for Mark-Ups. These 
are added to the Sale footing of Merchandise 
Purchases. 



331 



XXIV How to Figure Profit 

The seventh division (7) is designated as the 
Gross Profit Basis, which means that the figures 
in this division represent the gross profit which 
will be made on the week's sales. These figures 
are net, the additions and deductions having been 
made in the process of bringing the Merchandise 
Purchases to this division. 

These footings added to the previous inventory 
footings will give the net merchandise cost and 
selling prices as of the close of the week and 
the gross profit which will be made on the week's 
sales if the per cent is carried out. This is what 
was meant in a previous chapter by ^'figuring 
ahead" or "anticipating profits". It represents 
the average gross profit you should make on sales. 
Is it up to your expectations? Does it represent 
a satisfactory net profit? These and similar ques- 
tions should suggest themselves to you at the close 
of the week's operations. 

The eighth division (8) is for the Sales for the 
week, which should be brought from the Sales 
Record. The per cent of gross profit in the Basis 
division (7) will be the per cent to deduct from 
sales to get the cost of sales, which should be 
entered in the cost column. These two footings. 
Cost and Sale, should be subtracted from the Cost 
and Sale footings in the Basis division (7) and 



233 



MERCHANDISE SUMMARY FOR MONTH ENDING 




/nvcn(orji al Beginnini 
End of First Weelt 
£^nd of Second Week 

E-Kd of Third Week 

End of Fourth Week 

End of Month 

Totab for Month 



Figure 7 
Merchandise Summary 



Working Outline for a Trading Business XXIV 

the results extended to the ninth division (9) as 
representing the net cost and selHng values of the 
unsold stock. 

The Second Week's Operations 

The second week's operations may be carried 
out in the same manner, and so on to the end of 
the month, when certain other items of charge 
and deduction may need be brought into this Sum- 
mary to show the net merchandise results for the 
month, including stock returned, etc. 

The Month's Operations 
The inventory value of the unsold stock at the 
end of the month — cost and selling prices — should 
be brought to the Basis division (7) on a new 
page for the next month. 

Take a Monthly Statement 
In aSdition to the Merchandise Summary opera- 
tions and results, a complete Monthly Statement 
should be taken (minus a physical inventory) if 
your system of bookkeeping permits of it. You 
ought not to allow a month to pass without hav- 
ing a complete analysis of your business and 
knowing your net results. 

Of course, a record of stock may be kept and 
a weekly analysis of merchandise made without 
keeping a complete cost system, but the latter, it 



S33 



XXIV How to Figure Profit 

will be found, even by small merchants, will pay 
for itself many times over. 

Inventory at Selling Price 

The keeping of a weekly summary of merchan- 
dise, as above outlined, implies the taking of your 
annual inventory on a basis of the selling, not the 
invoice, price. In short, all figuring relating to 
profit should be done on a basis of the selling 
price — the reverse of the usual practice. 

The purpose of taking an annual inventory 
under this system is simply to verify the book 
inventory. If no mistakes have been made in 
listing the stock as it came in, or in making addi- 
tions, deductions, etc., and there has been no 
stealing, the two inventories will agree. 



234 



XXV 

Expense Chart for a Non-Trading 
Business 



Non-trading businesses are in two general divis- 
ions, namely, Revenue and Mutual, each division 
being subdivided according to the nature of the 
business. 



Revenue Business 

In a Revenue business, the expenses should be 
divided into Operating and Direct, with an addi- 
tional Statement deduction for Interest on In- 
vestment, as in a trading business. 

Mutual Business 

The following Chart is that of a Mutual busi- 
ness, said to be the largest in the state and the 
second largest of its kind in the United States. 

It will be noted that the expenses are in one 
division. Not being a money-making business, 
but conducted and operated for mutual advantage 



235 



XXV How to Figure Profit 

and benefit, a subdivision of the expenses would 
be of no value except perhaps for statistical pur- 
poses. 

Expense Chart: 

Accountancy Expense 

Advertising — Newspaper 

Advertising — Circular and General 

Agents' Convention Expenses 

Agents' Fees and Commissions 

Adjustment of Losses 

Collection and Exchange 

Depreciation of Plant 

Directors' Fees and Expense 

Freight, Express, Cartage and Parcel Post — In 

Heat 

Insurance — Fidelity 

Insurance — Fire 

Insurance — Liability 

Interest Allowed 

Janitor Service 

Janitor and Lavatory Supplies and Expense 

Legal Fees and Expense 

Light 

Losses Paid 

Miscellaneous Expense 

Office Supplies and Expense 

Postage 



236 



Expense Chart for a Non-Trading Business XXV 

Registry and Notary Expense 

Repairs to Buildings and Building Fixtures 

Repairs to Office Furniture and Equipment 

Salaries of Officers 

Salaries of Office Employes 

Stationery, Printing and Supplies 

Taxes — City, County, State and School 

Taxes — Corporation 

Taxes — Revenue 

Taxes — Special 

Telephone Rent 

Telephone and Telegraph Tolls 

Traveling and Hotel Expenses 

Water 



237 



XXVI 
Treatment of Certain Expense Accounts 



Rent o£ Building 

In every business and in every form of busi- 
ness proprietorship, if the store or factory build- 
ing is rented, the amount paid for rent is an 
expense incurred in the running of the business 
and must be so listed and accounted for in the 
ledger. 

It IS clear that, if the building occupied is rented 
rather than owned, less capital is necessary by the 
value of the building. 

But, if the building is owned, no separate track 
need be kept of the rent or of what the rent would 
be if not owned, it being included in the item of 
interest on the total investment, unless it be pre- 
ferred to take the value of the store out of the 
capital investment, in which case such rent should 
be taken into consideration as the store would 
bring if rented to someone else, less repairs, insur- 
ance, taxes, etc. See "Interest on Investment" 
following. 



238 



Treatment of Certain Expense Accounts XXVI 

Proprietorship Salary or Salaries 

This has to do only with individual proprietor- 
ship and general or limited partnership. In either 
of these forms of proprietorship, not only should 
the salary of the proprietors who give their time 
to the business be charted as an operating expense, 
but the account should be carried in the ledger. 
In too many cases individual proprietors and part- 
ners fail to take into account their own salaries 
in listing their operating expenses, which leads 
them to think they are making money, whereas, 
as a matter of fact, they may be losing. The 
salary a proprietor or partner should charge 
should be measured by the amount another of 
equal ability or earning capacity filling the same 
position could demand. 

The individual proprietor or partner who makes 
no charge for his services would usually not think 
of filling a similar position with a corporation, as 
secretary or manager, without being assured of a 
definite salary; and yet the conditions are the 
same, except that, in any one of the first three 
forms of proprietorship, he may feel that his posi- 
tion is more secure. 

Depreciation 

Estimated Rather Than Measured — This is an 



239 



XXVI How to Figure Profit 

account which is little understood by business 
men generally and not always handled in the same 
way even by accountants. It is confusing in that 
it does not represent a direct outlay of money for 
the charge made, that is, the charge is estimated 
rather than measured by a direct money outlay. 
Nor is there any set rule which can be followed 
in making a charge to this account. Conditions 
even in the same line differ under different man- 
agements and under different business pressures. 

All items do not depreciate alike, and in scarcely 
any two businesses does the same item depreciate 
in the same ratio. 

Take a building, for example, if it is kept up 
to a high standard — painted and repaired as 
needed — the per cent of depreciation will be 
much lower than if it is neglected and allowed 
to run down. 

Proper maintenance and repairs will extend the 
life of any item of property and reduce the per 
cent of depreciation, but it will not eliminate it. 

The charge for maintenance and repairs is tan- 
gible; it represents a direct money outlay and no 
one questions its place in the list of operating 
expenses. 

If One Is, the Other Is — Now, since every charge 
to maintenance and repairs represents an exten- 



240 



Treatment of Certain Expense Accounts XXVI 

sion of the life of the property and a correspond- 
ing reduction in the rate of depreciation, it is 
clear that such charge is equivalent to a charge 
to depreciation; that is, if one is justifiable, the 
other is justifiable. Therefore, if a charge for a 
certain amount of depreciation (Maintenance and 
Repairs) is justifiable, a charge for the remainder, 
the depreciation which is slowly but surely taking 
place, is justifiable and the amount can be ascer- 
tained with reasonable accuracy. 

No matter how well we keep a building or an 
article of personal property in repair, the time 
will come when it will be valueless, which means 
that deterioration is going on, however slowly, 
every minute. 

Charges to maintenance and repairs therefore 
will not wholly take care of depreciation, however 
much they may lessen it, and a depreciation ac- 
count must be included in the operating expenses 
of every business, whether manufacturing, trad- 
ing or non-trading. 

Bad Accounts 

An Operating Expense — If a collection or credit 
department is maintained, the expense incurred is 
clearly chargeable to the selling or commerical 



»41 



XXVI How to Figure Profit 

end of the business under proper hea3s or titles. 
This department in some businesses is just as 
necessary as the accounting or the purchasing 
department. 

Even though a regular collection department, 
so called, is not maintained in every business, a 
certain amount of time and attention and expense 
is necessary even in the smallest business and 
must be taken into consideration in the operating 
expenses. 

As to the matter of accounts which are bad and 
charged off, however, the case may seem to many 
somewhat different. For example, when a sale is 
made, a personal account is charged for the 
amount of the sale and a certain profit is cred- 
ited under earnings. Now, if this account should 
prove to be worthless, it is evident that a ficti- 
tious profit has been carried in the books and 
perhaps shown in the statements and a sudden, 
unexpected loss is the result, and possibly at a 
time when the management of the business can 
least afford it. Frequently businesses are sent to 
the wall because of these unexpected losses. 

Create a Reserve — But the suddenness, the unex- 
pectedness of these losses may be broken, eased 
up, and a financial crash averted by anticipating 
such losses and creating at the opening of the 



242 



Treatment of Certain Expense Accounts XXVI 

account or accounts what is known to accountants 
and economists as a Reserve, crediting to this ac- 
count and debiting to Operating expense monthly 
such a per cent of the account or accounts, or, in 
other words, sales, as will meet the probable losses 
of this kind as they occur. By this practice the 
loss is not prevented, but simply lightened, dis- 
tributed over a period of time, each month bear- 
ing a little of the burden — its share. The principle 
is much the same as that of depreciation or in- 
surance (in which every one now believes) and 
may be likened thereto. 

A Necessary Evil — Of course, a strictly cash 
business would make this unnecessary, as it would 
also collection and credit expense, but all busi- 
nesses do not and cannot sell for cash and this 
item of expense seems, therefore, to be a necessary 
evil. Keen judgment, good management and close 
attention to the sales end of the business will keep 
the per cent of losses of this kind down to a small 
item, but it cannot be wholly eliminated while a 
credit system is in operation. 

The per cent to charge to this account monthly 
must be governed by experience and the attention 
given to accounts receivable by the management 
of the business. 

While the item may not seem to be so necessary 



243 



XXVI How to Figure Profit 

to the conduct of the business as are other items 
of expense connected with the collection or credit 
department, yet it seems to creep in just the same 
and must be recognized in some way if a finan- 
cially safe business is to be conducted. 

Indeed, the keeping of this account (Reserve) 
will sooner or later open the eyes of the manage- 
ment of the business to the necessity for the 
closest attention to the giving of credit and to 
the making of collections. 

Interest on Borrowed Capital 

For Current Needs — There seems to be a differ- 
ence of opinion as to the treatment of interest 
allowed for the use of money borrowed to meet 
the needs of the business, due very likely to the 
different viewpoints from which it is considered 
by those who study it. 

Interest on borrowed capital is not an item 
necessary to the running of a business which is 
operated under financially favorable conditions; 
but few businesses seem to be able to run without 
borrowing money, which increases the expense of 
conducting the business by the amount of the 
charge for the interest allowed therefor; and this 
is true whether interest is regarded as a direct or 
an indirect charge to capital earnings. 



244 



Treatment of Certain Expense Accounts XXVI 

As state3 under another head, following, it is 
the author's opinion that "interest on investment" 
should not be carried in the ledger, but that it 
should appear in the statement. Interest on bor- 
rowed capital, on the other hand, should appear 
in the ledger, but not under operating expenses. 

If there is sufficient capital, it will not be neces- 
sary to borrow money and there will be no interest 
to enter into the running expenses of the business. 
Therefore, since interest is not by the nature of 
the business a necessary item of expense thereto, 
it should not be added to the operating expenses 
of the business; but, since it represents a direct 
money outlay, it must of necessity, unlike interest 
on investment, come into the ledger, but thru what 
we call a direct charge to capital earnings ; that is, 
it is charged at once to Loss and Gain or segre- 
gated to a class of accounts previously referred to 
as Special, Direct or Extraordinary and later 
charged to Loss and Gain. 

In other words, in fairness to the earning 
capacity or power of the business it should not 
be charged to the operating expenses, but brought 
in as a special or direct charge against the profits 
from operations and other earnings. Of course, 
the fact must not be lost sight of that interest 
allowed is a legitimate expense to the business, 
but it shoulH be properly classified. 



245 



XXVI How to Figure Profit 

By this classification, a business may be put on 
its mettle, so to speak, and its earning capacity 
or power or possibilities determined. 

The monthly statement should be so classified 
as to show, to this point, five divisions of profit, 
corresponding to the four divisions of cost and 
the interest deduction, namely: 

1. The profit represented by the margin follow- 
ing the deduction of Prime Cost or Manufactur- 
ing Cost from Sale Price, and designated as Gross 
Profit I. 

2. The profit represented by the margin follow- 
ing the deduction of the Carrying Expense and 
Merchandise Deductions (mercantile business), 
and designated as Gross Profit 11. 

3. The profit represented by the margin follow- 
ing the deduction of the Operating Expenses, and 
designated as Gross Profit III. 

4. The profit represented by the margin follow- 
ing the addition of Other Earnings, and desig- 
nated as Gross Profit IV. 

5. The profit represented by the margin follow- 
ing the deduction of the Direct Charges, and des- 
ignated as Nominal Net Profit. 

6. The profit represented by the margin follow- 
ing the deduction of the Interest on Investment, 
and designated as Net Profit. 



246 



Treatment of Certain Expense Accounts XXVI 

The per cent of gross profit must, therefore, be 
sufficient to cover not only the expense incident 
to the operations, but the direct charges as well — 
and more, as noted. 

For Construction Purposes — Money borrowed for 
the erection of buildings, the purchase of machin- 
ery or other equipment brings up another phase 
of interest charge which is also quite generally 
misunderstood. 

To get at the matter clearly, let us assume that 
a certain corporation has a paid-in cash capital of 
$50,000. From this it expends $30,000 for build- 
ings, machinery and equipment, reserving $20,000 
for working capital. 

If the business is rightly managed, it should not 
be necessary to borrow any money and hence there 
will be no interest to pay. Nevertheless, the busi- 
ness should yield a profit sufficient to equal at least 
6% on $50,000. Of course, it should yield more 
to make the investment profitable, as has already 
been explained. 

Now, let us assume, on the other hanS, that 
the company is capitalized for only $25,000 and 
borrows $25,000 additional, investing $30,000 in 
buildings, etc., and reserving $20,000 for work- 
ing capital, as before, is the situation with refer- 
ence to profit changed? 



2ir 



XXVI How to Figure Profit 

True, interest will have to be paid on the money 
borrowed, but should it be treated differently from 
the interest paid on money borrowed for working 
capital? There is absolutely no difference. It is 
a direct charge against capital earnings and should 
be so treated in the ledger and in the statement. 

The business is expected to, and will under 
proper management, yield a sufficient profit to pay 
this interest and meet the loan as it becomes due. 
The statement may show more, but it should show 
this at least, provided the loan is not out of pro- 
portion to the earning power of the business, 
which, of course is a matter to be considered at 
the time of making the loan. 

Now, whether the statement shows an addi- 
tional earning (nominal net) or not, the stock- 
holders are receiving interest (dividend) on their 
investment to the extent of the payment on the 
loan, whether this be equal to six per cent, more 
or less; and, when the loan is fully paid up, their 
stock will have at least doubled in value if the 
plant has been properly maintained, since, whereas 
they started with a business worth $25,000 net, 
now they have a business worth at least $50,000, 
$25,000 having accumulated from profits. They 
may have received no dividend directly, but, indi- 
rectly, they have, thru the increased value of their 



248 



Treatment of Certain Expense Accounts XXVI 

stock, which has been brought about by the appli- 
cation of the profits to the payment of the loan 
used to erect buildings, purchase machinery, etc. 
The money paid for interest cannot, of course, 
in this case or any other, be capitalized. It is a 
legitimate expense to the business, but not an 
operating expense and should not be so treated. 

Interest Not an Operating Expense 

For the benefit of those who may not clearly 
see wherein interest on borrowed capital is not 
an operating expense, we will take a concrete 
example : 

Let us assume that A, whose ability and train- 
ing enable him to command a salary of $200 a 
month, desires to engage in business on his own 
account; but, having no ready money, he induces 
twenty-five friends to loan him $1000 each at 
6%. This of course must be paid from the earn- 
ings of the business; that is, in return for the 
$25,000 which A invests, the business, after pay- 
ing all operating expenses, will pay him, from 
the profits remaining, 6% and he, in turn, will 
pay this to the twenty-five persons of whom he 
made the loan to cover the interest thereon. What 
would be the difference if the money borrowed 
stood as a direct obligation against the business 



349 



XXVI How to Figure Profit 

rather than against A? Absolutely no difference. 
The business will pay the same interest and for 
the same purpose, namely, for operating capital. 
The amount which the business will pay A is 
simply a fair, just and reasonable return for the 
capital which he invested. It is only what every 
business should pay (at least) on invested capital, 
in fairness to those who make the investment. 
And this is true whether the proprietor invests 
his own money or money he borrows from some- 
one else. A business is entitled to a capital invest- 
ment in proportion to its producing power. If the 
proprietor does not supply the necessary capital 
anH the business is forced to borrow it, the inter- 
est should be charged to the proprietor (deducted 
from earnings left after the operating expenses 
are deducted), not to the business thru the operat- 
ing expenses. 

And it is immaterial whether the proprietor 
borrows the money which the business needs or 
whether the business borrows it in its own name. 
In either case the amount represents simply an 
equitable investment, in return for which the 
business will produce a gross profit sufficient to 
pay all operating expenses and leave a margin 
of at least 6% on the capital employed or in- 
vested — if the undertaking is successful. 



250 



Treatment of Certain Expense Accounts XXVI 

Of course, if the business borrows money in its 
own name to supply needs which should be sup- 
plied by the proprietorship of the business, the 
interest on the money so borrowed will be paid 
before the interest on the investment of the pro- 
prietorship is paid, and it is right that it should. 
The entry for this will involve a debit to Loss and 
Gain (direct charge to Capital Earnings) and a 
credit to Cash or Bank, as the case may be. 

What is left after making this deduction from 
earnings belongs to the proprietorship, since the 
obligations of the business outside of proprietor- 
ship have been met. Hence, the deduction so 
made, together with previous deductions, consti- 
tutes Total Deductions from Capital Earnings — 
from the viewpoint of the business. 

Thus it will be seen that, where the business 
borrows money in addition to proprietorship in- 
vestment, there will be two deductions following 
that for Operating Expenses, one for Direct 
Charges and the other for Interest on Investment, 
not because the nature of the investment or capital 
employed requires that a deduction be made, but 
because the interest on the money borrowed should 
be paid first, since it represents a direct money 
outlay, now or at a future time, and it is there- 
fore properly chargeable to Capital Earnings be- 



251 



XXVI How to Figure Profit 

fore there is a remainder which the proprietor 
may call his own — Nominal Net Profit. 

And what is true of single proprietorship is 
also true of plural proprietorship, as partnership 
or corporate form of business organization. 

Interest on Investment 

Not a Ledger Account — ^While this can best be 
understood by making an analysis of business 
proprietorship, yet in no case should a ledger 
account be kept with interest on capital invest- 
ment. This should be taken care of in another 
way. 

He is Entitled to It — As stated in another chap- 
ter, a person who invests money in a business, 
whether the proprietorship be individual, partner- 
ship or corporate, should receive for its use the 
same rate of interest he would if he loaned the 
money at the current rate of interest on good 
security — and more. Every person investing 
money in a business, regardless of the form of 
proprietorship, is taking some chances and, to 
insure him, or partly so, against loss, he should 
receive more than the current rate of interest on 
his investment. But the interest, at least, must 
be provided or he will lose money. How this 



252 



Treatment of Certain Expense Accounts XXVI 

should be provided depends in a measure upon 
the form of proprietorship, and yet, as previously 
stated, a distinction ought not to be made because 
of the form of the proprietorship. 

For the Purpose of Fixing the Selling Price Only — 
If a person engages in business by himself (indi- 
vidual proprietorship) the interest should be listed 
with the expenses which go to make up the total 
expense of doing business for the purpose of fix- 
ing the selling price, but appear in the monthly 
and yearly statements by itself. 

Should be Distinguished From Net Profit — The 
reason for so listing the interest item is to enable 
the proprietor to ascertain the gross profit the 
business should pay on the average daily sales to 
insure his coming out even on his investment in- 
dependent of the net profit to which he is entitled 
for the risk and responsibility assumed. 

Although this item of interest may be carried 
in the ledger in the case of individual proprietor- 
ship, or even in the case of a general or a limited 
partnership, it is not advisable or technically right 
that it be so carried. 

To explain more clearly the item of interest to 
be included in the chart of expenses, suppose that 
the investment is $5,000 and the rate of interest 
which a secured loan would pay is six per cent, 



253 



XXVI How to Figure Profit 

the yearly amount of interest to list would be 
$300. 

In a general partnership, interest on the two 
or more investments may be treated in the same 
way and must be viewed in the same light by the 
partners investing in the business. This of course 
must not be confused with interest on loans made 
by the partners or on money left in the business 
by them. 

Treated the Same — In these two forms of pro- 
prietorship, while the monthly and yearly state- 
ments will show the conditions exactly as they 
should be, in the loss and gain account in the 
ledger this item of interest will appear as an in- 
creased earning; that is, if no account is kept 
with it, as there should not be, there will be no 
debit or deduction against the earnings, as there 
will be in the statement. But it is not necessary. 
The loss and gain balance is closed to the pro- 
prietorship account or accounts, as the case may 
be, thus giving this account or these accounts 
credit for the profit which the business has pro- 
duced, the interest on the investment not deducted. 

The purpose of the statement is simply to show 
the financial condition and the earning capacity 
or power of the business, its strong and its weak 
points, etc. 



254 



Treatment of Certain Expense Accounts XXVI 

Stockholders Entitled to Interest — In the light of 
interest on the money invested and the extra com- 
pensation for the risk taken, a corporation is not 
materially different from the other two forms of 
proprietorship, except that an account with this 
particular interest should not be carried in the 
ledger, whatever may be the excuse for carrying 
it in either of the other two forms. This item 
should be taken into consideration, however, in 
charting the expenses and in making the statement, 
as in the other two forms of proprietorship, and 
the gross profit should be sufficient to meet it and 
show a net profit besides. 

In other words, a person investing in a corpor- 
ation should expect to receive a sufficient dividend 
to cover the current rate of interest on his invest- 
ment and at least as much more to compensate 
him for the risk taken, otherwise he might better 
place his money where he would be sure of the 
current rate of interest as well as the principal, 
and be relieved of all anxiety in regard thereto. 

The extra amount to which the investor is en- 
titled may be paid in the form of an increased 
dividend or it may be passed to surplus for ex- 
pansion purposes, thereby increasing the value of 
the stock. 

Of course, there are business corporations 



255 



XXVI How to Figure Profit 

which do not pay even the current rate of inter- 
est on the money invested, directly or indirectly, 
but that is not, under ordinary circumstances, a 
credit to the management or to the judgment of 
the stockholder who invested his money. 



256 



PART THREE 



By Way of Suggestion 
Chapters XXVII to XXVIII 



XXVII 
A Bookkeeping System 



As stated in the Introduction, it is not the 
function or mission of this book to go into the 
details of systematization or accountancy, yet 
whatever be the kind or nature or purpose or 
magnitude of the business, or whether the pro- 
prietorship be Individual, Partnership or Corpor- 
ate, a bookkeeping system is necessary to the 
safety of the money invested and to the growth 
and development of the business. 

Single Entry 

Unfortunately, too many persons in business are 
content with keeping accounts with persons only, 
which has to do merely with collections and pay- 
ments, disregarding the accounts which have to 
do with the life and soul of the business. 

No business can produce the profit on invest- 
ment possible whose management is satisfied to 
wait until the end of the year to find out the net 
gain or loss for the year or, worse yet, to go on 
indefinitely without this information. 



259 



XXVII How to Figure Profit 

The purpose of a physical or periodical inven- 
tory should be simply to verify the book figures, 
rather than to make a financial or a loss and gain 
statement possible. 

Double Entry — Cost System 

While the system of bookkeeping employed 
should show, among other things, the correct 
value of the assets and liabilities, the expenses 
involved in the conduct of the business and the 
earnings from the capital at work in the business, 
yet no system is complete, whether simple or com- 
plex, which does not enable the management to 
know to a reasonable certainty, daily, weekly and 
monthly, the profit made on every dollar's worth 
of goods sold, the cost of the goods sold, the value 
of the stock on hand, the expense involved in 
effecting the sales and the earnings from the 
sales, etc 

The way to stop a leak is to prevent it and the 
time for this is before the loss occurs. What it 
would cost to prevent a leak would be only a frac- 
tion of the loss sustained thru the leak. 

Why They Do Not Keep Books — Some business 
men say that they do not keep books because the 
expense is too great, but the loss they sustain in 



260 



A Bookkeeping System XXVII 

not keeping a set of books they do not seem to 
mind at all — because they do not know what they 
are losing or wherein they are losing. They are 
simply groping in the dark. As a rule, busi- 
ness men waste more time during dull hours than 
would keep up a cost system. 

Adapt the System to Your Business — If a book- 
keeping system is adapted to a business, rather 
than a business to a system, the time and ex- 
pense will be small compared to the results. The 
simpler the system of course in any business the 
better, but it should be complete. If a bookkeep- 
ing system is necessary in a large business, it is 
necessary in a small business, but on a propor- 
tionately small yet complete scale. 

It Does Not Imply a Cost System — One thing 
which should be put down as a settled fact is that 
double entry bookkeeping is necessary to a cost 
system, but it does not imply a cost system; that 
IS, the mere fact that a set of books is being kept 
by double entry does not imply that a cost system 
is being kept, neither does it imply any particular 
degree of system, as the term is known in accoun- 
tancy. Double entry is a step from single entry 
towards system, but it is not in itself system. 

A Cost System Possible — Again, a cost system 
(simple of course) is possible even in a hotel or in 



261 



XXVII How to Figure Profit 

a restaurant or in a barber shop, as well as in the 
largest manufacturing or mercantile business, and 
just as necessary. A business grows in large part 
thru system. A large business is large usually 
because of system, and a small business is small 
usually because of a lack of system. 

No More Time Involved — Again, double entry, 
rightly installed, involves no more time or labor 
than single entry, except a few minutes at the end 
of each month, and a complete cost system in- 
volves but little additional time — not enough to be 
considered in comparison with the satisfaction of 
knowing daily, weekly, monthly and yearly the 
exact condition of one^s business and whether he 
is making or losing, wherein and how much. 



263 



XXVIII 
Mutual Understanding 



Educate the Public 

Every insurance agent will testify to the fact 
that the more enlightened a prospect is on the 
subject of insurance, the more easily and quickly 
and satisfactorily business can be done with him. 

The same is true of business in general. The 
better business is understood, the more the public 
know about it, especially the technical side, the 
sooner will the business man gain their confidence, 
the more likely he will be to get their patronage 
and co-operation and the less likely they will be to 
doubt or even question his right to the profit he 
makes. On the contrary, they would respect him 
more for making a profit than they would for 
selling at a loss. The average person at least 
wants to see all other persons succeed and pros- 
per. 

Therefore, the sooner the public become edu- 
cated to the fact that business men must make 
a reasonable profit and that they are making only 
a reasonable profit, the better it will be for the 



263 



XXVIII How to Figure Profit 

business men. Indeed, if business men could go 
so far as to tell their customers, as a few are now 
doing, that all net profit over 5% would be re- 
turned to them at the end of the year in the form 
of a dividend they would add to their surplus 
thru increased sales. 

The confidence of those with whom we deal 
is a great factor in the building of a business. 
There should be no secrets about a business which 
is rightly conducted, and there would not be if 
the public rightly understood the expenses in- 
volved in the conduct of a business and the neces- 
sity for a reasonable net profit. 

A Word to the Consumer 

Because a retail merchant's prices seem high 
to you do not think he is robbing you. The reason 
for high prices may be well-founded. It may be 
no fault of the merchant. He must make a sufKi- 
cient profit to cover the expense of doing business 
and a little more — he is entitled to at least 5% net, 
but not all make that. They think they do, but 
they do not seem to get ahead. Their theories 
and the net results do not agree and this should 
be apparent to you. 

Most men in business are honest. They could 



264 



Mutual Understanding XXVIII 

not do business year in and year out on any other 
basis. If the retailer, or middleman, is to be con- 
sidered a factor, if he has a place in business, he 
must do business on a business basis; he must 
make his expenses and a reasonable profit besides. 
Do not forget that it costs money to handle goods ; 
that the retail merchant buys in much larger quan- 
tities than you buy of him and at a lower price 
than you could buy in small quantities of the same 
source from which he buys; that his investment 
is much larger and his risk much greater than 
yours; that he brings to your door the articles 
you would otherwise have to go some distance to 
get or take your chance in getting thru circular or 
catalog description — and that all this involves an 
expense which you should be willing to stand in 
return for the convenience and satisfaction and 
promptness of the service which he renders you. 



265 



